Novice Investing - Starbucks Starry Face

Date: Tuesday 13th 2008f May 2008 07:16:38 AM

Starbucks Starry Face - 01/31/2008

By: Hari Wibowo

Starbucks Inc. (SBUX) reported its 4th quarter earning result which is worse than our predicted trajectory earnings for Starbucks we discussed a while back. Starbucks earned $ 208.1 Million or 28 cents per share during the 4th quarter of 2007. What is shocking is that Starbucks reported 1% decrease in same store sales in the US while global same store sales increase by only 1 %. Wow. Only last quarter, same store sales was still up 5% in the United States.

To improve sales, Starbucks will open more stores overseas than it does in the United States. As part of the fix, Starbucks will eliminate its hot breakfast sandwich from the menu this fall. This will bring Starbucks coffee enthusiast back as the smell of sandwich is obstructing the smell of Starbucks coffee. As a result of this initiative, Starbucks expect revenue to be adversely affected as each store will be losing an average of $ 35000 of sandwich revenue. Multiply that with a number of stores in the US (~8500 stores), and that sandwich removal will cost starbucks $ 297 Million in revenue, or 3% of total revenue. While small, assuming steady fixed cost and 57% gross margin, it will shave earning per share by $ 0.23 per share.

With Starbucks not expected to register significant same store sales improvement, earning growth would be tampered as well. Previously, we estimate that for 5% same store sales increase, Starbucks would register 20% earning growth for the following 5 years without any new store opening. With same store sales in the funk, now we would not expect any Earning per Share (EPS) growth from the same stores count. Therefore, with same store sales expected to be down due to breakfast sandwich elimination, EPS for Starbucks would be flat for the next two years. At this point, we should treat Starbucks as a no growth stocks with a fair stock value at a P/E of 15 at most. This implies a yield of 6.67% which is better than risk-free treasury yield.

With $ 1.00 per share of expected EPS this year, Starbucks fair value is around $ 15 per share. Thus, to include Starbucks at our sample portfolio

stocks, we should purchase Starbucks when it reaches $ 10 per share. With Starbucks recently trading at $ 19 per share, it is still a long way down for the stock.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Starbucks Inc. (SBUX) or any other securities.

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