Starbucks Takes a Spill — But Has It Cooled for Good?

SBUX hammered on weakness in Europe, Middle East and Africa

   
Starbucks Takes a Spill — But Has It Cooled for Good?

Starbucks (NASDAQ:SBUX) reported decent earnings after the bell Thursday, brewing up 18% gains in profit for its fiscal second quarter. The Seattle coffee king also raised its forecast on the year thanks to the better-than-expected results.

However, the report still left a bitter taste in investors’ mouths, and Starbucks stock took a spill of as much as 6% in early trading Friday thanks to weakness in Europe and surrounding regions offsetting decent gains in the Americas and Asia.

For a global coffee giant with an eye on world domination, investors apparently are more concerned with avenues for growth in new markets than they are with SBUX maintaining its dominance in the U.S. or predictabl growth in China.

Specifically, revenue at Starbucks cafes open at least a year in Europe, the Middle East, Russia and Africa actually declined compared to the previous report. That offset a jump in global revenue of about 7% overall, and an 8% rise at Starbucks locations in the Americas.

Anyone who has an Internet connection should know that the sovereign debt crisis in Europe has weighed on many businesses across the Atlantic. We just learned this week that the U.K. economy is in a “double-dip” recession, as GDP for Britain fell 0.2% in the first three months of 2012. There’s also the recent downgrade of Spain’s credit rating from Standard & Poor’s. It’s not all that surprising, then, to see headwinds for Starbucks in the broader European marketplace.

Then there’s the geopolitical unrest in the Middle East and Africa, which certainly is a factor.

Starbucks CFO Troy Alstead was quick to remind investors of these factors, saying the coffee company is “not immune” to regional disruptions.

No kidding.

Its primary competitor McDonald’s (NYSE:MCD) has seen weakness in 2012, and SBUX is following suit with troubles in these key international markets. Dunkin Brands (NASDAQ:DNKN) admittedly is up strongly year-to-date — but while it’s a specialty beverage powerhouse in the U.S., it’s not on the same scale and hardly has the same global presence as Starbucks or MCD.

So does this slide mean Starbucks is losing its edge? Hardly. The company posted very good results across the board. As mentioned, earnings jumped 18% to $309.9 million on the quarter vs. $261.6 million last year. That was right in line with expectations. Overall revenues also were up almost 15% to $3.2 billion from $2.8 billion in the second quarter of last year.

The problem, then, isn’t the results, but investor expectations. Starbucks just set a new 52-week high on April 13 after jumping 35% in just more than three months and 70% in the 12 months prior.

As Ethan Roberts explained a few weeks ago on InvestorPlace, SBUX is an admirable company — just not after that kind of run-up.

Investors didn’t take into account the very obvious troubles overseas and were happily buying Starbucks stock. The recent earnings report, while mostly good, has at least tempered expectations.

There’s every reason to expect continued success for Starbucks in the long term. China sales are growing briskly (read more about Starbucks’ China strategy) and sales across North and South America are strong. And yes, Europe eventually will get its act together. But in the short term, the headwinds are clear and investors are not as jubilant as they once were.

That could mean a few months of struggle for Starbucks.

On the plus side, Disney (NYSE:DIS) will begin rolling out themed Starbucks stores at its parks. That should at least entertain shareholders while they wait for the dust to clear.

Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/starbucks-takes-a-spill-but-has-it-cooled-for-good-sbux/.

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