Starbucks is scheduled to report fiscal 1Q10 after the close today and it should be another good quarter. I think SBUX’s earnings could come in a penny better than the street’s $0.28 per share estimate. Same-store sales trends and operating margins should continue to improve sequentially from the fourth quarter. I am modeling +1.5% same-store sales growth in the U.S. (assumes a 20 bp improvement in 2-year average trends from 4Q09), which would mark the first quarter of positive growth since fiscal 4Q07. My +3% comparable store sales estimate for the international segment implies flat 2-year average trends from the fourth quarter. The company is facing its easiest same-store sales and margins comparisons in the first quarter. From a cost savings standpoint, the company will get the biggest YOY benefit in the first quarter as it had only implemented $75 million of the total $580 million in FY09 cost during 1Q09.
SBUX has worked and should continue to work as the company continues to grow margins throughout the year. Same-store sales are likely to continue to get better as the economy improves and the company’s guidance of “modestly positive comparable store sales” growth is easily achievable, as is the company’s EPS guidance of +15%-20%. This is already baked into expectations, however, as the street’s full-year 2010 EPS estimate of $1.02 implies nearly 28% growth. Relative to expectations, there is a lot less upside potential for SBUX. A little over six months ago when I published my SBUX Black Book, I called SBUX “underloved” by the sell-side community. Since then the stock has moved nearly 60% higher, and analysts are now more bullish on the name (as shown below).
Back in June 2009, Keith McCullough also highlighted in the SBUX Black Book that from a sentiment perspective that SBUX was a buy. Specifically, he said, “Short interest as a % of the float is lower than what it was but still relatively high for a stock with this kind of market cap (6% of the float). Insider activity has been benign for 2009 to date. However, shareholder concentration factors here are also screaming buy. Away from Fidelity, no institutional investor owns this stock for real. Capital Research is approaching 4% of the shares out, but away from that position you easily make it into the top 10 holders of this stock with 2-2.5% of the shares outstanding.”
Today, short interest has fallen to 2.6%. Fidelity still holds the number one position with 11% ownership and you can still make into the top 10 holders with 2-2.5% of the shares outstanding. The difference now is that Capital Research’s ownership is above 5%, T. Rowe is above 4% and two other holders are approaching 4% (Barclays and Vanguard). So, more ownership is now required to make it into the top 5 positions.
Sentiment has turned for SBUX, and with expectations so high, it is getting increasingly harder to pound the table on this name. Again, the first quarter will be strong, but with the stock now trading over 10x on a NTM EV/EBITDA basis, there is less to be excited about. That being said, I am excited about the prospects of VIA and look forward to hearing how the product fared during the first quarter. To recall, 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. Management did say that it intends to spend significantly higher marketing dollars than any typical quarter to support the launch in Q1 and that VIA should be profit neutral during fiscal 2010 so the level of spending behind the brand during the quarter and the year remains a big question.
June 8, 2009: