Starbucks' chief financial officer on Thursday said meeting the high end of the coffee shop chain's 2007 earnings forecast will be "very challenging" due to rising dairy costs and slowing sales growth in its U.S. business, sending shares to a 20-month low.
CFO Michael Casey also said the company would maintain the number of U.S. store openings at about 1,700 annually for the next few years to relieve pressure on older outlets, and so the company can funnel more resources into international markets including China and Brazil.
Starbucks has forecast fiscal 2007 earnings of 87 cents to 89 cents per share, while analysts, on average, expect 89 cents per share, according to Reuters Estimates.
"We recognize that the upper end of that range will be very challenging in the current environment, which includes, among other things, rising dairy costs and soft transaction growth in our U.S. business," Casey said during a presentation at the William Blair Growth Stock Conference in Chicago, which was broadcast over the Internet.
Starbucks' shares fell as much as 4.2 percent to $26.17, the lowest level since October 2005. The stock has dropped more than 30 percent since hitting a lifetime high of $40.01 on November 16, due to investor concerns about slowing growth and more competition from fast-food rivals in the United States, higher dairy and labor costs and weakened overall consumer spending.
"Dairy has risen at an extremely rapid rate in recent months and is expected to continue at a high level for the remainder of the year," Casey said.
Don Gher, chief investment officer of Bellevue, Washington-based Coldstream Capital Management, said higher dairy prices, increased competition and slower sales growth have created a "perfect storm of nagging little problems" that are preventing Starbucks' results from exceeding Wall Street estimates -- a phenomenon many investors had come to count on.
"Whereas in past years the company has always seemed to underpromise and overdeliver, currently they are in a year where they will be promising or guiding and just delivering on their guidance," Gher said. "That tends to take momentum players out of the equation. They walk away from stocks like that."
Both Gher and Coldstream own Starbucks shares.
Also on Thursday, Casey said the Seattle-based company still plans to open 2,400 stores this year, including 1,700 in the United States. The number of U.S. store openings will likely not increase in the next few years, he said.
"Going forward, maintaining the number of U.S. openings at the current level over the next several years will allow us to be more selective in choosing locations and will reduce the pressure new stores put on existing stores," he said.
Starbucks plans to increase the number of international stores by 20 percent annually over the next few years, Casey said. Starbucks in recent years has increased emphasis on its international business and has said China will one day be its biggest market outside the United States.
"The international business is one of our key growth drivers going forward, and one that investors have not fully recognized," Casey said.
He repeated a previous company forecast that same-store sales, or sales at coffee shops open at least 13 months, will rise 3 percent to 7 percent in the current fiscal year. He also reiterated the company's target of 20 percent net revenue growth this year.