Starbucks Braces For Earnings (SBUX)

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Starbucks Corp. (NASDAQ: SBUX) is set to report earnings right after the close of trading today.  Unfortunately, it isn’t expected to look that pretty.  To make matters worse, the report has a look-back to the end of September, and October was the first month where Joe Consumer went from slowing discretionary spending and regular mini-luxury spending habits down to a slowdown in spending that is off the cliff.

Thomson Reuters (First Call) has earnings estimates at $0.13 EPS and$2.58 billion in revenues.  This earnings would be a drop of almost 40%from $0.21 EPS and a gain of only about 6% in revenues from this lastquarter of 2007. 

Today also marks the fiscal year-end report.  Estimates for the comingquarter are $0.28 EPS on $2.87 billion in revenues, which wouldrepresent a gain of about 4% on EPS and about 4% in revenues comparedto the quarter-end for 2007.

It is very difficult to imagine that the high-end coffee retailer isgoing to want to go on a limb and offer guidance for a year out.  But incase Mr. Schultz does, the estimates for the year ahead are $0.87 EPSon $10.84 billion in revenues.  If estimates are met today and ifsomehow next year’s estimates are accurate, that would representforward growth of about 17% on EPS and almost 4% for the coming year’srevenues.

It is really hard to hold a handle on this sort of forecasting fromanalysts for the quarters ahead in today’s environment.  Starbucks hasno mandatory place in the economy and now that other stores have mostlyor partly caught up to the Starbucks image and now that Joe Consumer ispencing his pennies, the company will not get its own TARP equivalentand only a direct stimulus paid out directly to consumers will add toforward discretionary spending.

But there is good news.  We recently told our newsletter subscribersthat with a market cap of $7.4 billion and with the stock brieflytrading under $10.00 that at some point there are really two storieshere: Starbucks North America and Starbucks International.  The companyhas peaked on its US-growth and is even contracting its underperformingstores.  We do not expect the value of an international standalonefranchise would have the value in a global recession that it would haveotherwise in normal times.  But at some point the value of this entirecompany could be worth the same as just the international side of thebusiness as a growth model. 

Options traders are not even expecting a move of $1.00 in eitherdirection and the chart is trying to hold on after rallying from $9.50all the way up to $13.00 before it petered out hard.  its stock hasgiven almost all of those gains up, and that up and back down all tookplace in the last ten trading days.

We aren’t convinced that the market is able to price in anything closeto all the known news for known events yet.  So we cannot say themarket should be braced for almost anything the company says.  If thiswas anything close to a normal market, we’d tell you that the marketshould have already priced in every bit of bad news it could rationallythink of.

Jon C. Ogg 
November 10, 2008