Earnings Preview: Starbucks

Starbucks (SBUX) is expected to report Q2 earnings after market close Wednesday (April 30) with a conference call scheduled for 5:00 pm ET.

Guidance

Analysts are looking for a profit of 21c on revenue of $2.63B. The consensus range is 20c to 22c for EPS, and revenue of $2.57B to $2.71B, according to First Call.

Citing weakness in the U.S. consumer environment, the coffee retailer unexpectedly forecast Q2 EPS 15c on April 23; Starbucks said charges negatively impacted EPS by approximately 3c for the quarter. The company now expects FY08 EPS to be somewhat lower than the 87c it reported in FY07, vs. First Call consensus of 97c. Starbucks also expects a mid-single-digit decline in U.S. same-store sales for the quarter.

Analyst Views

On a positive note, William Blair said its research continues to indicate competition "is not a discernible contributor" to its weakening sales trends, and that customers are not "substituting their Starbucks Experience with coffee products from others."

Agreeing, Piper Jaffray said the issues Starbucks faces is a result of both internal and external factors, including macro-economic factors, and to a lesser degree, competition. Analysts and investors will expect Starbucks to announce its three-year strategy to combat the weak economy and lower consumer spending. CEO Howard Schultz has hinted at "segmentation" as a way of appealing to all types of customers and increasing sales. Piper Jaffray believes this turnaround phase will last at least 18 to 24 months.

In an effort to refocus on coffee, the company recently announced plans to overhaul its entertainment business.

Comments

[RafaelGrillo]

It is hard to believe that competition is having only a minor impact on Starbucks situation. Consumer will not drink less coffee because of the economic situation, but they will drink less expensive one. It is typical case of demand elasticity, aggravated by the fact that the quality of the competitive product (from McDonalds to DD) has not only improved, but in some case surpassed Starbucks'. Starbucks needs more than to refocus on coffee: it needs to reinvent the experience, and that is a tall order.