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.
