DURATION MATTERS FOR SBUX

Starbucks seems to be acutely aware of past mistakes and we do not expect management to repeat the mistakes that brought the stock under $10 in 2009.  We would not advise buying the stock at this point, however, given that the Street is likely too bullish on EPS for 2HFY12.  The longer-term story for Starbucks remains one of the very best in the space but the likely impact of near-term headwinds leads us to look elsewhere over the TRADE (three weeks or less) and TREND (three months or more) durations.

Starbucks CFO Troy Alstead took the stage today at the William Blair Growth Stock Conference.  Below are the primary takeaways of the presentation:

  • The company now expects $0.44-0.45 EPS in 3QFY12 and $0.46-0.47 EPS in 4QFY12 versus prior guidance of $0.45-0.46 and $0.46-0.48, respectively.  The Street, according to Bloomberg, is expecting $0.46 and $0.49 EPS in 3QFY12 and 4QFY12, respectively.  The revision in guidance is due to costs associated with the Bay Bread LLC acquisition.  Overall, the La Boulange acquisition will be $0.02 dilutive to FY12 EPS and will also dilute FY13 EPS.
  • Investing in La Boulange and Evolution Fresh is going to be a headwind to EPS going forward; there is a potential for capital needs to come in larger than expected given the distribution capabilities that need to be built out to cater for both brands on a national basis.
  • Starbucks see continuing weakness in the EMEA division.
  • Coffee is expected to be a tailwind in FY13

Conclusion


We would not advise clients to buy this stock at this point in time.  We have liked the name for over three years but believe that sentiment has gotten ahead of the fundamental outlook of the company.  Company guidance is indicating that estimates are too high for FY12 and increasing economic uncertainty in Europe could cause actual earnings to come in even lower than the guidance is suggesting.  

Howard Penney

Managing Director

Rory Green

Analyst