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Decoding the Wall Street Journal: Starbucks Serves Up a Cold, No-Foam Outlook


Considering the soft underbelly of the quarter and so-so outlook, the market will likely continue to unwind some of the relative premium baked into Starbucks shares.

Editor's note: This newsletter originally appeared on Decoding The Wall Street Journal, a new website based on a book co-authored by former CNBC anchor Nicole Lapin and former Wall Street analyst Brian Sozzi. Like the book, this newsletter aims to unlock hidden financial clues embedded in world news.

Earlier in the week we at my website asked a straightforward question: What was the busiest retailer not named Apple (AAPL) during the holiday season? The answer was none other than Starbucks (SBUX), and boy did it show in its financial report card presented to parent-like investors after the market closed (sound smart: after the bell). The company's sales were as strong as a cup of its black coffee, reflecting those higher prices it's charging for that Venti Redeye and more people visiting its location. Yes, believe it or not, Starbucks lured in more people in the U.S. (7% more to be exact) due to an improved economy that is causing a consumer splurge on a Tall (small) coffee on the trip home from the mall, or pre-packaged food for lunch in addition to the meal brought from home.

However, there were a couple other factors in the mix for the steamy sales quarter from Starbucks. First, Starbucks products are sprouting up like weeds in grocery stores, and it has launched those tidy single-serve K-cups for that Keurig machine you scored for the holidays. Second, Starbucks is continuing to take its brand global -- notably, to China -- and in the process is creating a caffeinated Mother Earth.

In running down the numbers from Starbucks we couldn't help but notice what we call "CEO speak," or that extra special language that executives have developed to dissect a company's performance. Comparable to Wall Street gibberish, "CEO speak" is an art passed down from one generation of executives to the next and is the byproduct of the corporate machine culture.

Decoding Toolbox: Sound Like a CEO
  • Value offerings: Cheaper priced products that offer good bang for the buck. For Starbucks, this would be a Tall coffee with an espresso shot in it.
  • Global footprint: Company is selling products globally through its own stores or the stores owned by others.
  • CPG business: For Starbucks, this is their Consumer Products Group, or the segment responsible for selling stuff to supermarkets.
  • Firing on all cylinders: Most areas of the company's business are doing financially well.
  • Operational efficiencies: Somewhere, somehow, the company has found a way to cut expenses.
Sleuth Confidential: Our "no go" call on Starbucks in front of earnings (stock is prepared to be sold on the news) caps off another very successful week for team decoding, with the homerun of course being the pre-earnings bullish call on Apple. You see, making finance accessible through the use of actual English (do we really have to hear about cups, handles, and flags?) could, and should, be done as a means to win in the stock market. Since we are trailblazing in this department, it's exciting to the team when stock calls unfold exactly as planned.

As it pertains to Starbucks, although its sales were strong everywhere except Europe, operating margins in all segments were down, and in some cases down alarmingly. Yes, most of the pressure was the result of higher coffee costs, but we also sensed margin restraint arising from expenses associated with expanding the brand into new products and markets. No expense leverage on a 9% same-store sales increase is disappointing, plain and simple.

Considering the soft underbelly of the quarter and so-so outlook, we think the market will continue to unwind some of the relative premium baked into Starbucks shares. Might want to let the selling subside before establishing a position (sound smart: don't buy the dip).
No positions in stocks mentioned.
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