Starbucks Earnings Outlook Holds Amid Coffee Price Increases – But is Target Reachable?

by Burke Speaker | August 18, 2010 10:02 am

Keeping focus in a grim market, Starbucks (NASDAQ: SBUX[1]) is pledging to maintain its profit outlook for its next fiscal year. This is despite the increase in coffee bean prices Starbucks is facing that would normally pose some complications to SBUX stock and the bottom line.

Starbucks recently added the effect of coffee price increase in the commodities market to its outlook, noting a hit of 4 cents per share. However, investors should take note that SBUX still expects to earn $1.36 to $1.41 a share in its 2011 fiscal year, beginning in October.

On average, analysts have forecasted Starbucks earnings of $1.23 per share for the 2010 fiscal year ending Sept. 30. Starbucks has said it will be able to absorb the price spikes, through “managing the dynamic” internally, which will likely amount to closing some international locations.

The company still has plenty of growth potential, although with coffee market spikes that growth could be slower in the next year. While privately held Dunkin’ Donuts and recent specialty beverage heavyweight McDonald’s (NYSE: MCD[2]) have certainly given Starbucks a run for its money amid weaker consumer spending, SBUX has seemed to stabilize in 2010. In the last few years, Starbucks has shed some 600 stores in underperforming locations, an admission that so-called “store cannibalization” was seen as a major problem, and called former CEO Howard Schultz to revitalize the brand. The result has been a great line of new products and a deliberate approach to expansion that has built shareholder value.

Yet the stock itself is currently in flux despite its recent earnings wins. Comparable store Starbucks sales were up +9%, its operating margin increased some +10% and global traffic increased by +6%, according to its third-quarter earnings. All clear achievements, but SBUX stock still hasn’t quite rebounded from its summer high of $28.09, down to about $24 as of this writing. Shares are still in the money year-to-date with a +5% gain, but off about -15% in the last two months.

But the future appears bright for Starbucks. New product launches have given the company something to gloat over. Starbucks’ Via Ready Brew series, its relatively new instant coffee line, hit the $100 million sales mark after only 10 months. Via has achieved sales of about 30%of the market share in that specific segment of the coffee market – no small feat. And as a premium instant at-home coffee that doesn’t require special equipment (or skill for that matter), the company’s new product is meeting untapped demand and has big future potential. In June, its Ready Brew Iced Coffee was launched, offering SBUX opportunities to further broaden the customer base in the U.S. and abroad.

Other than instant coffee, the company has smartly offered free Wi-Fi Internet service to attract more U.S. consumers, many of whom shied away from – even dumped altogether – their weekly coffee spending during the economic slump.

All of this is leading to good news for the company overall, leading to better news for stockholders. Starbucks declared its first dividend in March, and raised its quarterly payout to 13 cents a share from 10 cents. As well, the coffee chain has increased profits three straight quarters and reaffirmed its pledge of fiscal year 2011 growth.

But other successes in recent months haven’t exactly helped Starbucks break out. The stock is up 25% in the last 12 months – double the broader market – but SBUX has essentially been flat since March.

With positive earning signs now and on the horizon, many investors may be drinking to Starbucks’ good health. But as the last few months have shown us, a decent outlook may not be enough to deliver significant gains.

And even worse, if SBUX misses the mark, it could be more choppy trading ahead for the coffee company.

As of this writing, Burke Speaker did not own a position in Starbucks.

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