Starbucks Thin Growth

So, Starbuck’s (SBUX) met their number of 19 cents a share that the analyst expected, giving them 18% earning growth. Great? Make it worth paying 27 times earnings? No, let’s look closer.  In Q1 2007 SBUX bought back $50 million worth of stock.  In Q2, that number exploded to $513 million dollars or 17.1 million shares. This represent 2.1% of diluted outstanding shares and was the reason Starbucks met expectations.  After all the negative publicity recently, a miss would have lead to a share sell-off and more stories about the "end of the line" for Starbucks. While I applaud share buybacks as a way to enhance shareholder value, Starbucks cannot continue to spend $500 million a quarter to reach earnings estimates.  They need to grow store traffic

The much heralded international expansion witnessed earnings growth of only 9% and that is disappointing.  When you add margin pressure in both domestic and international operations, you now have additional earnings pressure going forward.  Domestic same store sales growth was a paltry 4% leading me to wonder "when will Mr. James Donald SBUX CEO finally admit McDonald’s coffee offerings are impacting sales?" He never had to address the issue as not a single analyst’s question on the earning call broached the subject.  Consider this: Of the 4% growth, only 1% of that was additional transactions and the other 3% was simply selling those people more items. Even those numbers are skewed as 1.5% of the 3% was price increases over last year.  If we back this out, Starbucks experienced 2.5% actual US store growth on a comparable basis. 

Management consistently maintained that they were coming of a "very tough quarter for comparisons."  Translation? "We did better last year." It also means that new stores are not garnering new Starbucks customers but rather cannibalizing them from other existing stores.  Not good

Today on CNBC Donald said "we do not really consider or discuss our competition".  He’d better start. They are stealing his business. Attracting only 1% more people per quarter will not meet high earnings expectations or justify the nearly twice them PE ratio the shares now enjoy. Shares  of Starbucks are down this year and will not go any.

Todd Sullivan