SBUX: Starbucks Can Teach Tech Companies A Thing or Two About Growth

By William Trent, CFA of Stock Market Beat

Our earnings preview of Starbucks (SBUX) said “probably no surprise, but risk probably to the downside when they are making this kind of move.” Today the company reported earnings:

Fiscal Second Quarter 2007 Highlights:* Consolidated net revenues of $2.3 billion, an increase of 20 percent
* Net earnings of $151 million, an increase of 18 percent
* Net earnings per share of $0.19, compared to $0.16 per share, an increase of 19 percent
* 560 retail store openings
* Comparable store sales growth of four percent, versus most difficult quarterly comparison this year

Analysts were expecting $2.3 billion in sales and $0.19 in earnings per share, so we were right about the no surprise. However, shares traded up after market hours. Since we are long the shares, we actually prefer being wrong about the downside risk in this instance.

The 4% same store sales number was the weakest link, coming in at the low end of the 3-5% range that was prevailing back when the company used to report monthly. The “tough comparisons” story will be put to the test beginning this quarter.

In contrast to many of the technology stocks we follow, Starbucks actually managed to reduce inventory in the first six months of its fiscal year, despite opening a thousand-odd new stores. Presumably some of the inventory in October was the additional holiday knick-knacks one finds there.

Free cash flow for the first six months was $146 million after the investment in all the new stores. Again, something some tech companies could learn a lesson from.

Disclosure: Author is long Starbucks (SBUX) at time of publication.

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