Starbucks: In Need of Caffeine?

The coffee behemoth posted results that met Street views but investors, seeing higher expenses and a tougher 2007, battered shares

It appears that sales at Starbucks (SBUX) could use a little perking up. The Seattle coffee chain met analysts' targets even though its net income dipped because of an accounting change.

The Seattle coffee giant's net earnings during the quarter fell 5.6%, to $117 million, or 15 cents a share, compared to $123 million, or 17 cents a share, in the same quarter of 2005. Results reflect reductions to earnings from one-time accounting changes such as FIN 47, which addresses asset retirement obligations, and SFAS 123R, the expensing of stock compensation. Without those accounting changes, earnings would have been 19 cents per share. The mean analyst estimate had been 17 cents per share, according to the San Francisco research firm StarMine.

Sales and Revenue Up

Sales at stores open for at least a year—a crucial metric in retailing—rose 5%, right in the middle of the company's forecast range. Total revenue rose 21% year over year, to $2.0 billion for the fourth quarter. (Earlier announcements on July, August, and September sales had implied that the company's quarterly revenue would come out much higher than it had been during the comparable period of 2005.)

Starbucks lately has been paying more for green coffee and shifting its offerings to less profitable products such as food in a bid to keep customers from defecting to rivals such as Dunkin' Donuts. Starbucks' new products include everything from warm breakfast sandwiches to Mitch Albom's novel For One More Day.

Investors Wary

In trading after the market close, Starbucks' shares fell 5.7%, to $37.20, as investors grew concerned about higher operating expenses at a time when sales and gross margins are likely to be squeezed. Before the earnings announcement, the stock rose 1.2%, to close at $39.43 per share on the Nasdaq.

Looking ahead, Starbucks plans to open about 2,400 new stores in fiscal 2007 and expects net revenue growth of approximately 20%, comparable store sales growth in the range of 3% to 7%, and per-share earnings of $0.87 to $0.89 per share. Starbucks has opened 1,040 new company-operated retail stores in the last 12 months and had sales growth of 5% for the recent quarter at stores open more than a year.

For the full year, Starbucks' net earnings grew 14.2% year over year, to $564 million.