Fiscal 3Q10 was a great quarter and after listening to the earnings call, I was left thinking that everything seems to be working well. Starbucks continues to have sales momentum, is investing in the right areas of the business and most importantly, has the financial flexibility to continue to do so. However, as I said yesterday, expectations have caught up with the company.
I have been confident in Starbucks’ ability to continue to yield better results in fiscal 2010, but I never expected the level of same-store sales growth achieved year-to-date in the U.S., particularly the 9% growth in 3Q10. To that end, I have underestimated the company, but expectations will remain high as the company’s FY11 same-store sales guidance of low-to-mid single digit growth assumes a fairly steady improvement in two-year trends. For reference, +1% same-store sales growth in the U.S. in FY11 would imply a 350 bp improvement in two-year average trends from FY10 (assuming 6.5% growth for FY10).
I think same-store sales and margin growth will continue to materialize in FY11 but the rate of growth will slow and the company’s ability to continue to surprise to the upside from both top-line and bottom-line perspectives will likely diminish. That being said, I think the stock still makes sense on a long-term basis as the company stands to benefit from continued leverage of its existing store base, international growth, its increased investment in marketing and its pursuit of additional platforms of growth (largely VIA and Seattle’s Best Coffee).
Given current expectations and the stock’s recent performance, getting the right entry point matters most. Below I provided Keith McCullough’s long-term buy TAIL and sell TRADE levels.
Relative to our restaurant sigma charts that look at same-store sales and restaurant-level margin growth, Starbucks is likely to remain in the “Nirvana” quadrant in fiscal 4Q10 with both positive same-store sales and YOY restaurant-level margin growth. Management guided to mid single-digit comp growth in both the fourth quarter and for the full year. A +5% number implies a 50 bp sequential improvement in two-year average trends. For FY11, I am modeling positive same-store sales and restaurant level margin growth; though the company may dip out of “Nirvana” from quarter-to-quarter as a function of difficult comparisons.
Starbucks Read-Through:
We know now that Starbucks had a strong quarter, particularly from a top-line perspective in the U.S. I do not think these strong results, however, should be interpreted to mean that we will see similarly strong demand for the remainder of the restaurant companies left to report calendar 2Q10 results. To recall, we already know that casual dining trends on average, as reported by Malcolm Knapp, slowed about 50 bps in 2Q10 on a two-year average basis from the prior quarter.
Howard Penney
Managing Director
