Starbucks Earnings Will Suffer From Closures Through Mid 2009

No, "I am not happy" about Starbucks (SBUX) results yesterday so stop emailing me. Unless, my stance on the company for the last year and a half stropped some people from investing in it and losing their shirts. In that case I am happy for them.

Wednesday morning I said:

Here is what is happening. This quarter is going to be abysmal. These moves will allow Howard to say on the earnings call, "recent actions will save us "x" per year". This will make it look like things are going to get better. Howard will also take the charges this quarter so as to hide the terrible operating performance he will turn in. It will be a convoluted earnings release in which the losses will be made to look like the results of "one time charges.

Earlier I said flatly that "estimates are for 15 cents a share, Starbucks will miss that".

Starbucks, less than 24 hours later said:

Consolidated net revenues increased 9 percent to $2.6 billion for the third quarter of 2008, compared to $2.4 billion for the third quarter of 2007. For the 13-week period ended June 29, 2008, Starbucks reported a net loss of $6.7 million compared to net income of $158.3 million for the same period a year ago. Earnings per share [EPS] for the quarter was $(0.01), compared to EPS of $0.21 per share earned in the prior year period. The company estimates that costs associated with the ongoing implementation of its transformation agenda impacted third quarter 2008 EPS by approximately $0.17 per share, primarily for restructuring charges associated with the U.S. company-operated store closures announced on July 1, 2008 totaling $167.7 million pre-tax or $0.14 per share after tax.

In other words, "what he said".

Here is a gem from the release:

The combination of all these actions is estimated to result in a pre-tax benefit of approximately $200 million to $210 million in fiscal 2009, which equates to approximately $0.17 to $0.18 of EPS. The beneficial impact estimated here excludes the related carry over of the lease termination and severance costs from the store closure actions.

So, the company makes it look like you can add 17 to 18 cents a share to earnings next year due to the closures. But, then it tells you that number excludes "lease termination and severance costs" from those closures that will be present. So, how about just giving us the real number? Why is Starbucks always playing these games? Once again it tries to paint a nice picture but leave investors guessing as to the reality.

Here was line that surprised me: "Of note, many of the company’s operating expenses are fixed in nature. As a result, the softness in U.S. revenues during the third quarter fiscal 2008 impacted nearly all consolidated and U.S. segment operating expense line items when viewed as a percentage of sales." Simply put, there is not much cost cutting that can be done other than headcount and stores.

Starbucks now expects full-year fiscal 2008 non-GAAP EPS to be in the mid-seventy-cent range, which excludes the $0.19 year-to-date impact from restructuring and other transformation costs, as well as additional costs to be incurred in the fourth quarter related to executing on recently announced decisions. Full-year fiscal 2008 EPS, on a GAAP basis, will be impacted by the remaining restructuring charges that are expected to be spread across the fourth quarter of fiscal 2008 and the first half of fiscal 2009, the timing of which is dependent on lease termination negotiations with third parties. In line with this revised view, Starbucks anticipates total net revenue growth of approximately 11 percent in fiscal year 2008. These targets reflect the company’s current assumption that fourth quarter company-operated comparable store sales trends will remain relatively stable with the third quarter.

Translation? Earnings are going to get hit from closures through mid 2009. These "one time events" in earnings releases will continue for the next year. Another thing, why is the company assuming same store sales trends will be stable? Haven't they been declining for a year now? Ought not the company assume "continued deterioration"?

Here is the problem in a nutshell. "The company’s lower than expected revenue growth was driven by continued slow traffic trends in the U.S., which resulted in a mid-single-digit decline in U.S. comparable store sales, and was a slight deterioration from the second quarter." Until that reverses, this slide will continue.

Disclosure: None

Comments

[Swiss_Buffett:]

Todd, I have been reading all your posts here on SBUX, and you have been right in basically every single aspect. However, I wonder how much worse the news might still get for SBUX as the stock has not sold off much since their Q3/FY08 earnings release. I wonder if there is more downside for the stock price. My "feeling" is that as long as the international story remains intact, maybe $14/$15 is the bottom. Also there is this Peltz investor who might keep accumulating shares at these prices, putting a floor under the stock price.

But could the international story turn sour on them? I think it could. China's largest export market (the U.S.) is in pain and it should be expected that this will cause a slowdown in China as well. Interestingly, HSBC Bank in their latest earnings release spoke of (starting) slowdowns in some parts of Asia, and they can feel the pulse pretty well in the region I would think...

I guess a good indicator would be if insiders started buying the shares again. Even Schultz has bought nothing since he became CEO again. Not exactly a sign of great conviction.

Sorry for my rather incoherent rambling. I would like to buy SBUX but I guess the best is to just stand-by for now, as you say.

2008 Aug 06 10:09 AM