Is the Starbucks Momentum Trade Over?
Starbucks, the Seattle-based coffee company, continues to expand globally. In the upcoming year, Starbucks plans to accelerate unit growth by opening 1,000 new stores to its existent 17,400 locations worldwide.
The menu has been revamped, as well. In April, Starbucks added caffeinated fruit drinks known as Starbucks Refreshers. In June, with the $100 million acquisition of San Francisco-based BayBread, Starbucks introduced La Boulange brand bakery products to increase the sales of non-coffee items.
These improvements may make the world’s largest coffee shop chain appear stronger than ever, but Starbucks’ second-quarter financial results tell a different story.
Second-quarter same-store sales estimates failed to meet expectations on April 26. Sales at stores open at least 13 months rose 7 percent globally, below projections of 8.2 percent.
After the report, Starbucks stock fell 4 percent in after-market trading. The stock continues to trade flat near $52, after coming off a high of $61.15 on April 26. A recent UBS report suggested the momentum trade may be over for Starbucks.
Investors are receiving mixed signals, but analysts are confident that Starbucks stock will trade higher in the near future.
Nicole Miller Regan, Piper Jaffray senior research analyst, cited high commodity costs as a likely culprit of the recent decline.
“Higher coffee costs hit them [Starbucks] in fiscal ’12 and ’13 at 40-plus cents per earnings. You can only imagine how high earnings would have been absent that,” Regan said. “We’re hoping to see at least maybe a third to half of that back in fiscal ’13 as coffee roles over.”
In addition to a decline in coffee costs, the summer weather will likely boost consumer demand.
“The summer coffee beverages for Starbucks, Dunkin’ and McDonald’s had a huge seasonal impact in the last few years,” David Palmer, managing director at UBS, told CNBC. He expects summer 2012 to follow this trend and provide some relief for Starbucks stock.
Palmer explained that the slowdown in domestic same-store sales, weak Europe demand, later-than-expected input cost relief, and bias to invest in consumer packaged goods growth have all weighed down on the stock. Despite these setbacks, Palmer remains confident that Starbucks will regain its momentum.
“No this is not a short. This is a ‘buy’-rated stock. This thing is trading around 22 times calendar ’13. Twenty percent average (earnings per share) growth is what we’re forecasting for the next few years. At this cap-size, a big company like this is going to outperform,” Palmer explained.
“I’ll say ditto,” Piper Jaffray’s Regan said. “This is a stock you’re going to make money in.”
CNBC “Fast Money” contributor Pete Najarian shared the same sentiment: “I think this is all Europe right now. I don’t think this is a U.S. issue. I think they will be able to deflect some of that slowness, so I continue to like it.”
—By CNBC.com’s Madeline Laskoski
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Disclosure information for Nicole Miller Regan, David Palmer, and Pete Najarian was not immediately available.