Starbucks (NASDAQ:SBUX) shareholders are like the demanding parents of an A+ student: Anything less than perfection is simply not good enough.
Or in the case of Starbucks, maybe we should say, not great enough. Because without a doubt, Starbucks' financial results are consistently great -- it's just a question of shade of greatness. In this particular quarter, announced last night, the shade was judged to be on the lesser side of great, perhaps an A-. Consequently, the stock is trading down about 0.5% so far today.
Growth was fantastic, as you'd expect. Sales grew by 23%, while EPS managed a 21% increase. The A+ aspect was a stellar 8% growth in comparable store sales. Management made a point of noting that "the increase in comparable store sales was due almost entirely to an increase in customer transactions." Translation: The comp gains are the result of more sales, not higher prices, as many might expect.
The "A-" aspect of Starbucks' growth is EPS, which grew slower than sales. Many had expected Starbucks' strong sales growth would be leveraged at the bottom line. But operating margins for the quarter actually declined to 10.2% from 10.4% in the year-ago quarter.
The lower margins resulted primarily from higher green coffee costs, which bumped cost of goods sold to 41.1% of sales versus only 40.4% a year ago. Of course, management has no control over coffee costs. It just so happened that the price of green coffee hit a seven-year low at this time last year and has gradually increased since.
Still, for an A+ student, a declining operating margin, no matter how slight the decline, is somewhat disappointing. This is the type of demanding attitude shareholders rightfully take when their company trades at 40 times trailing earnings.
Even looking out to next year's expected earnings of $0.83 to $0.85 per share, Starbucks carries a 31x multiple. At that valuation, it will have to return to its A+ ways to deliver further gains to shareholders.
