Rob Black's Retail Stock Report

Includes: DG, KHC, SBUX
by: Rob Black
Starbucks (NASDAQ:SBUX) reported August same store sales growth of 5%, better than the 4% reported for July, albeit against an easier two-year comparison. Analysts were expecting comps to be up 4-to-5% in August and continue to model a 4% same store sales increase for the September quarter. 

Starbucks' cold blended beverage mix was down from that of July. The previously described morning bottleneck issue from increased demand for Frappuccinos may have eased along with the blended beverage sales mix as well as from managerial efforts to address the problem.

Dollar General (NYSE:DG) reported GAAP 2nd quarter 2006 EPS of $0.15 vs. $0.23, in line with Street consensus. The company’s revised guidance was $0.14-$0.15, reduced from $0.18-$0.22. Most notably, management indicated that it would be reviewing its inventory and real estate options, which could result in a write-off of aged inventory and/or a lowering of DG’s square footage growth plans.

An inventory write-off could ultimately benefit margins with less periodic markdowns. A slowdown in square footage expansion could allow management to better focus on improving the existing business. Expect Dollar General to provide further details on both by the end of the year.

Heinz (HNZ) reported 1st quarter 2007 (July) EPS of $0.58 $0.04 above consensus. Though all $0.04 came from a lower than anticipated tax rate, analysts were impressed by the 8.4% sales growth and increases in both the gross and operating margin (up 40 and 60 basis points respectively).

The components of sales growth were as follows: with volume/mix up 5.1% despite a 0.9% increase in pricing. The North American consumer business (13.0%), on the back of SmartOnes and Boston Market improvements, along with Asia/Pacific (12.2%), led the way. With the US consumer business humming along, and foodservice holding its own despite the restaurant industry’s struggles, the key to Heinz is Europe. In particular, it appears critical that the large UK business turns around, and that innovation -- rather than discounts -- drives higher volumes.