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SBUX – Continues to make progress

Starbucks is scheduled to report fiscal fourth quarter earnings after the close tomorrow.  The reported comparable sales number, primarily in the U.S., and any initial fiscal 2010 comp guidance will matter most relative to investor sentiment.


My $0.22 per share estimate is a penny higher than the street and is above the company’s $0.19-$0.20 per share guided range. 


Continued momentum from 3Q09:


Like last quarter, I am expecting continued sequential improvement in SBUX’s comparable sales growth.  My estimates assume a 3% decline in same-store sales growth in the U.S. (from -5% in 3Q09) and a -1% number in the company’s International segment (from -2%).  These assumptions imply that 2-year average growth remains even with last quarter, which could be conservative given the level of momentum in sales growth throughout the third quarter.


I would expect this sequentially better -3% results in the U.S. to be driven largely by continued improvement in traffic trends as check will continue to be pressured somewhat by the company’s recent focus on value offerings, such as its beverage and food pairings and discounts offered through its Starbucks loyalty card programs.


Margins should continue to look better on a YOY basis; though U.S. margins will most likely decline somewhat on a sequential basis from 3Q09’s reported 13.4% number.  This should not come as a surprise, however, as management set expectations lower for the fourth quarter, citing “normal seasonal variances in [its] U.S. business.”  Margin improvement will be driven largely by continued commodity cost favorability in the U.S. and the additional $180 million of costs savings that are expected to be implemented in the quarter. 


Looking at dairy costs, there has been some concerns out there over the recent increase in milk prices, which will no doubt have an impact on the business on a go forward basis, but milk prices on average were down 45% YOY during SBUX’s fiscal Q4 (even more than the average 41% decline during its fiscal 3Q09).  In October and November, some of this YOY favorability has diminished with prices down only about 20%.  But, this is more of a concern for the company come Q1. 


Starbucks recently addressed this concern in a press release after the Wall Street Journal published an article titled “Pricier Milk Could Curdle Profit Growth at Starbucks”, stating, “The Wall Street Journal article of October 11 omits an important aspect of Starbucks dairy cost management.  Approximately six month ago, Starbucks initiated a program to mitigate the price uncertainty of a portion of Starbucks future purchases of dairy products.”  I find it surprising that Starbucks even responded to this article, but I think it further highlights the fact that the company does not think the rising dairy prices pose a significant, immediate risk to earnings.  Management had stated on its 3Q earnings call that it expected dairy prices to be neutral to somewhat unfavorable to earnings on a YOY basis in fiscal 2010.  I am interested to learn more about this dairy cost management program because I don’t recall the company ever hedging its milk exposure in the past. 


Cost savings will play a major role in the quarter as the expected $180 million represents the peak in initiated savings year-to-date ($75M in Q1, $120M in Q2 and $175M in Q3).  That being said, the fourth quarter is also the last quarter before the company begins to lap these initiatives on a YOY basis.


Negative currency translation attributed to the 11% decline in International revenues in the third quarter as a result of the stronger U.S. dollar compared to the British Pound and the Canadian dollar.  In the fourth quarter, this trend continued but to a much lesser degree on a YOY basis.  Based on current exchange rates, this currency impact will likely turn positive in Q1.


Management already provided some fiscal 2010 guidance when it reported 3Q09 results.  Specifically, SBUX said it expects 13%-18% EPS growth (including the 53rd week), assuming 150-200 bps of margin improvement in the U.S. and 200-250 bps of margin growth from its international segment.  The company did not provide any comp guidance or unit growth targets, except to say that it expects to grow store counts year-over-year, driven primarily by international growth and some growth in the U.S.


I think any number better than -1% for U.S. comparable sales guidance would be both positive and reasonable.


Though not relevant to Q4 results, I would like to hear what management has to say about:


1.  the recently launched VIA product.  For reference, Starbucks put out a press release on October 12 stating that after only 2 weeks of national availability of Starbucks VIA, early indicators showed that the product was exceeding expectations. 


2.  how much it is planning to spend behind the brand (management already said it intends to spend significantly higher marketing dollars than any typical quarter to support the launch in Q1). 


3.  its recently announced plan to combine its two Starbucks Card programs in an effort to increase customer frequency.


4.  future plans for free cash flow usage.  As I have said before, I would like to see the company use its increased level of free cash flow in 2010 to establish a dividend.  I would also expect the company to begin to buy back stock again in 2010.



SBUX – Continues to make progress - sbux4q09

Bernanke Panders, Again!

Three minutes prior to the FOMC release, the Buck was Burning to the tune of -0.76%, down to $75.81. That’s -15% lower than where the price of what was once the world’s reserve currency was in March. Three minutes after the release, the US Dollar didn’t really budge.


The Fed made NO changes to the statement other than a token shift in the agency debt plan. The plan on rates is to keep pandering to the fear-mongering politics the moment, keeping rates “exceptionally low” for an “extended period” of time. Citizens of America who hope to save at a real rate of return, shame on you. Go back to your day jobs, if you still have one.


Although the marked-to-market facts have changed (GDP, stocks, credit, gold, oil, etc…), unfortunately Mr. Bernanke’s plan has not. He is being who they hired him to be. A conflicted and compromised head of the US Federal Reserve who is crushing the credibility of the currency, in search of short term political gain.



Keith R. McCullough
Chief Executive Officer


Bernanke Panders, Again!  - BernGeith

A Referendum? Not So Fast . . .

Many popular media outlets this morning are reporting on yesterday’s elections and suggesting that the results were an early referendum on President Obama.  Most pundits are focused on the gubernatorial races in New Jersey and Virginia and the facts don’t lie.  In both states, Republicans won despite fighting against Democratic incumbency. In New Jersey, Corzine’s advantage was solidified even more by the amount of money he spent on the race.  According to the New Jersey state Election Law Enforcement division, he spent $23.6MM compared to Christie’s $8.8MM, an almost three-fold advantage.  Yet despite these monetary and incumbency advantages, Republicans ruled the day, but what conclusions can we draw from these results?


The exit polling in both states provides some interesting insights.  In the table below, we’ve outlined percentage of the vote that each candidates received versus President Obama’s job approval rating in each state based on the exit polls, and then compared that to the 2008 Presidential election results.


A Referendum? Not So Fast . . . - table


Interestingly, President Obama has incredibly strong job approval ratings in New Jersey and solid approval in Virgina.  In fact, based on the exit polls, more people approve of the job that President Obama is doing in New Jersey than voted for him in 2008.  While the Virgina numbers look less supportive as President Obama’s approval rating is well below his margin of victory in 2008;  the devil is once again in the details.  The exit polls for Virginia also showed that for those who voted in this gubernatorial election, 43% voted for Obama in 2008 and 51% voted for McCain.   So the issue in Virginia was one of turn out, which admittedly does has some implication relating to approval for the President, rather than some broad based sea change relating to approval of President Obama.  In fact,  one could actually argue that President Obama’s favorability went up with those who voted in Virginia as his approval rating in exit polls was 48%, while only 43% of those polled voted for him in 2008.


Was this election an indictment of Obama? No, far from it. If anything, the elections suggest that President Obama continues to maintain an almost Teflon like status despite declining numbers in some national polls.  So, what can we take from these elections as we look towards the 2010 mid-terms? Perhaps not much.  In fact as the Washington Post reported today:


“In the 15 gubernatorial elections since 1949, the voters of New Jersey and Virginia have chosen governors belonging to the same party 10 times (seven Democrats, three Republicans). In five of those 10 elections, the party winning both governorships went on to pick up seats in the House and Senate the next year. In three, a sweep of the statehouses augured precisely the opposite result in the subsequent congressional election. Once, Democrats won both governors' races and went on to get a split result (losing seats in one house, gaining them in another). Once, the same thing happened to Republicans. Not a particularly compelling pattern.”


If anything these elections may be an early indicator of a shift in sentiment back towards the Republicans, buts as former Speaker of the House Tip O’Neill famously said, “All politics is local”, which is the key takeaway, along with the amazing approval resilience of President Obama.



Daryl G. Jones
Managing Director  

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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

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Sales Growth ≠ Consumer Health

Sales Growth  ≠ Consumer Health


Last week’s sports apparel numbers were not pretty. But underlying near-term trends are sound. Good news heading into Sales Day tomorrow. That said, this is rather meaningless as it relates to the true health of the consumer.


Not a good week for the sports apparel retailers last week. Are we alarmed? Nah.  Look at the relationship between trailing 5-week sales for this group and the ICSC comp set. Pretty good.


Are we bullish on the Consumer?  No way. As we noted in our 4Q themes call on Friday, we might be looking at impressive yy sales results, but on an underlying multi-year trend basis, they’re stagnant. The market won’t care about this while numbers are going up – which should continue to happen as this calendar year progresses.


Sales Growth  ≠ Consumer Health - Third Chart


Sales Growth  ≠ Consumer Health - Consumer Chart 1yr


Sales Growth  ≠ Consumer Health - Consumer Chart 3 yr


Sales Growth  ≠ Consumer Health - Table sportsapparel


Sales Growth  ≠ Consumer Health - chart sports apparel



Team Consumer Data Check: Short XLY

All the data points we monitor on the health of the consumer continue to flash RED.


HOUSING CONCERS CONTINUE - Today, the Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 8.2% to 608.3 from 562.3 last week; this was the first increase in a month on the back of lower mortgage rates.   The refinancing gauge jumped 15%, while the index of purchases fell for the fourth consecutive week.   The purchase Index includes all mortgages applications for the purchase of a single-family home.  It covers the entire market, both conventional and government loans.  The trends in the purchase index does not bode well for the next data point, existing home sales.



CONSUMER SPENDING PATTERNS - The Research Edge Retail team pointed out that the current results from MasterCard do not support a rebound in underlying consumer discretionary spending patterns. 


From the Retails team’s post today – “While showing continued progress on a number of fronts this quarter, MasterCard’s US credit card volume continues to show no meaningful signs of turning around. In fact, credit card volumes for the last three quarters now, on a year over year basis, have been: -16.9%, -18.9% and -17.9%; not the kinds of numbers that signal a recovery. Granted, the volumes have stabilized and importantly they have arrested the decline that was in place from 2Q08 through 1Q09, but since then we have yet to see them move decisively back towards the positive column, which is what we’d expect to see amid the backdrop of a real (vs. perceived) recovery.   For reference, credit card volumes are a better proxy than debit cards for the discretionary side of the US consumer’s wallet, as consumers tend to revolve discretionary items, whereas they put staples on debit cards which are paid in full at the time of purchase.”


Team Consumer Data Check: Short XLY - cc1



A DECLINE IN NON-ESSENTIAL CONSUMER SPENDING – The following is from a post that the Gaming, Lodging and Leisure team did on the subject of consumer spending:



Our macro math suggests declining discretionary spending over the next 5 quarters.  It could be even worse for casinos since their share of the discretionary wallet is already on the decline.


GDP = C + I + G + (EX – IM).  While the G may be expanding, C probably won’t.  Discretionary sectors are likely to see a smaller and smaller proportion of the consumer’s “wallet” over the next year or so.  As shown in the table below, our macro forecasts and healthcare cost projections indicate that 2010 will bring an accelerating drop in non-essential consumer spending, culminating in a $124 billion year over year decline (-11.4%) in Q3 of 2010.  Q3 2009 is looking more and more like an anomaly which makes it a very difficult comparison.  Due to leisure spending, both lodging companies and the cruise lines reported better than expected Q3 revenues.  For all of 2010 Research Edge projects a 5.2% decline. 


Team Consumer Data Check: Short XLY - CCC2


Despite GDP growth and the market rally since March, unemployment continues to increase.  As we have written about at length recently, gas prices are also going to negatively impact consumers’ spending power for the remainder of 2009 and into 2010.  For consumer spending on casino gambling and hotels, in particular, our post, “WHAT GOES UP…” (09/10/2009), shows that gaming is in a mean reversion period in terms of a percentage of personal consumption expenditure.  Gaming was strongly levered to the fifteen-year rip in housing-fueled PCE that ended in 2008.  A one-two punch of a smaller allocation of a more frugal consumer’s wallet could meaningfully impact the gaming industry’s top line next year.





The Consumer is a dominant factor in understanding the future of Healthcare spending and Healthcare equities.  What is typically thought to be a defensive sector and a safe haven in turbulent times, has been tightly linked with the health of the consumer since the beginning of 2009.  Healthcare consumption has been taking larger percentages of consumption, currently riding above 21.8% today.  There is a limit to how high this percentage can go, and further deceleration in consumer spending will accelerate the discovery process.  The leverage points vary across the Healthcare landscape.  There are the obvious Healthcare Discretionary stocks such as Aestheticsn (AGN, MRX) where the consumer impact is well known, but virtually no Healthcare Subsector has been left untouched in 2009.  Managed Care is the only group positively exposed to pressure on healthcare consumption through the Medical Loss Ratio.   Knowing where the consumer is heading will tell us where we need to be focusing both long and short. 


Team Consumer Data Check: Short XLY - cccc3


Team Consumer Data Check: Short XLY - cccc4



We remain short the XLY (Consumer Discretionary ETF) in the Virtual Portfolio.


Howard W. Penney

Managing Director



After being bearish for the better part of two years, we have been hearing from the field more data points that are incrementally positive for Burger King.  The industry issues remain, but the increased focus on value gets the brand back in the game. 




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