Netflix, Starbucks And The Resurrection Of The Middle Class

Starbucks (NASDAQ: SBUX) climbed another rung on the ladder of its recovery. The run of ever-spectacular results at Netflix (NASDAQ: NFLX) continues.The results of the two companies met at the crossroads of the new optimism of America’s middle class.

It did not help Starbucks shares but the retailer of expensive coffee posted a 9% improvement in its revenue to $2.5 billion. Comparable store sales were up 7%. Net income was up 769% to $217 million which says as much about the failure of Starbucks business model at the beginning of last year as it does about the company’s revival during the most recent quarter.

Netflix had equally impressive results. Revenue rose to $493 million from $394 million in the same quarter last year. Net income was up from $22 million in the period a year ago to $32 million in the quarter that ended March 31. The most impressive figure in the press release announcing Netflix’s numbers was that the firm ended the first quarter of 2010 with 13,967,000 total subscribers which was a  35% year-over-year improvement

The shares of Netflix and Starbucks did not react to their respective earnings, but both already trade near 52-week highs. The DVD rental company’s stock has gone from a 52-week low of $36.25 to its current price of $88.12. Starbucks has moved from a trough of $11.20 to where it trades now at $25.80.  Both stock are up about 135% from their lows.

The bottom of both share prices was made at the peak of the recession. There was an assumption on Wall St. that the middle class customers who make up the bulk of both company’s customers had withdrawn into shells to wait out the possibility that they would lose their jobs and the entire equity value of their homes. Many people emerged from the disaster employed and with underwater mortgages.

People who are well-to-do or close to well-to-do are spending again. There is evidence of that in the same-store sales of middle brow retailers like Macy’s (NYSE: M) and Nordstom (NYSE: JWN). And, the $4 coffee at Starbucks is affordable on a daily basis again. The coffee company said that its new instant brew helped its results, but the return of customers to its retail store was much more important.

The basic cost of a Netflix movie rental contract is $8.99 a month for one DVD at a time, and $13.99 for two. That might not seem much, but the two DVD program costs nearly $168 a year.  That is a lot of money for someone whose neighbor lost his job or who has trouble paying for his mortgage, child’s education, and gas money without access to a home equity line of credit.

The numbers from both the companies were nearly spectacular because the people with dirty shirts who go to McDonald’s  (NYSE: MCD) and watch ten-year-old DVDs never went to Starbucks or had Netflix subscriptions. That means that the middle class consumers had to return to their pre-2008 habits, and they have.

Douglas A. McIntyre