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Starbucks Takes Margin Hit as Coffee Prices Rise: Analyst

Starbucks' conservative approach to raising prices has enabled the coffee chain to post a increase in traffic and same-store sales in the last quarter as coffee prices continue to soar, said Matthew Difrisco, Lazard Capital Markets analyst.

"This year we already saw that they were willing to take a margin hit rather than scare away their traffic, and I think the last quarter—a 6 percent traffic gain behind their 8 percent same-store-sales number—shows that people are willing to pay a certain price and they're not being too aggressive with their own pricing," Difrisco said.

In the company's fiscal third-quarter earnings, the Seattle-based company forecast a 15 to 20 percent increase in its earnings per share in 2012 and a 10 percent increase in revenue.

Difrisco attributed the rise of coffee prices to very strong demand and a supply imbalance.

In the past year, coffee futures have increased more than 57 percent.

"It will take time for the supply to catch up with the demand," Difrisco added. "I think you're seeing a bigger pressure also probably in the grocery channel."

In the grocery channel, some companies are rolling back prices due to stronger margin pressure, he said.

On Aug. 23, Kraft Foods announced plans to cut prices by about 6 percent for its Maxwell House brand , following a decision on Aug. 16 by JM Smucker to cut pricesfor most of its brands, including Folgers, by 6 percent.

Not all traders are as optimistic about Starbucks' outlook as Difrisco. Traders Guy Adami and Joe Terranova both think that Starbucks is not a 'buy' right now.

"I agree that this is not the moment to buy," said trader Joe Terranova. "Goldman took this stock off the conviction buy list on July 7th. I’d also be looking for the exits." ______________________________

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Disclosures:

Disclosure information was not available for Matthew Difriscoor his company.

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