SBUX – INFLATION FORCES STARBUCK’S HAND

Costs are too much to absorb, according to CEO Howard Schultz.

 

August 31, 2010: SBUX says it has no plans to raises prices, even though it expects higher coffee costs to weaken its profits in the upcoming fiscal year.  Management said it is able to maintain its current prices because it has long-term relationships with farmers, traders and co-ops in multiple coffee-growing regions.  Importantly, it also has bought the majority of its coffee for its upcoming fiscal year.  No change in the fiscal 2011 EPS guidance of $1.36 to $1.41, which factors in an expected $0.04 hit from higher coffee prices. 

 

September 21, 2010: At a conference in LA, CEO Howard Schultz predicted a “tough” 2011, with conditions improving the following year.  At the time I thought this was a very odd comment.  What was going to make FY2011 so tough given how strong sales are?  Or have they slowed?

 

September 22, 2010: From the SBUX press release, SBUX is raising some prices “due to the recent dramatic increases in the price of green arabica coffee, currently close to a 13-year high, as well as significant volatility in the price of other key raw ingredients, including dairy, sugar and cocoa.”

 

So what had changed between late August and now?

  • Coffee is up 1.8%
  • Milk is up 3.8%
  • Sugar is up 23.1%
  • Cocoa is up 2.4%

SBUX – INFLATION FORCES STARBUCK’S HAND - sbux eps table

 

While we think same-store sales have slowed in 4Q10 on a one-year basis, the company reiterated its comfort level with current guidance, as management affirmed its forecast for the current fiscal year.

 

SBUX – INFLATION FORCES STARBUCK’S HAND - coffee and milk

 

Going into 2011, 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 350bp 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. 

 

Howard Penney

Managing Director


GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more