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Starbucks first quarter profit up 18 percent

By Nichola Groom
Reuters
Wednesday, January 31, 2007; 9:01 PM

LOS ANGELES (Reuters) - Starbucks Corp. (SBUX.O) said on Wednesday first quarter earnings rose 18 percent, meeting analysts' estimates, as it opened more than 8 stores a day and attracted customers with lunch offerings and gift cards.

The shares of the world's largest coffee shop chain rose about 1 percent in after-hours trading following the announcement as investors cheered its ability to rein in costs despite rising payroll, distribution and rent expenses.

"The company did an extremely good job of navigating through a very difficult expense pressure quarter," said Don Gher, chief investment officer of Coldstream Capital Management in Bellevue, Washington, which owns Starbucks shares.

Starbucks shares have dropped more than 11 percent since mid-November in part due to investor concerns about rising costs as the company steps up the pace of store growth.

Wednesday's announcement, however, should help to assuage those fears.

"Investors were concerned about the quarter because this is the first quarter that the company did not report (monthly) same-store sales, thus we were really flying blind," Gher said.

Net income for the fiscal first quarter was $205 million, or 26 cents per share, meeting analysts' average estimate, according to Reuters Estimates. In the same period last year, Starbucks earned $174 million, or 22 cents per share.

Sales at coffee shops open at least 13 months, a key retail measure known as same-store sales, rose 6 percent during the quarter. The number of transactions rose 4 percent, while the average value of each sale rose 2 percent.

On a conference call with analysts, Chief Executive Jim Donald said sales of lunch items, warm breakfast sandwiches and gift cards helped boost transactions. The company now offers lunch in 69 percent of U.S. stores, compared with 59 percent last year. Starbucks is also adding the warm sandwiches to several new markets this year.

A recent price increase on drinks also helped increase same-store sales.

Total revenue rose 21.8 percent to $2.36 billion. Wall Street was expecting revenue of about $2.35 billion, according to Reuters Estimates.

Starbucks said it opened a record 728 locations during the quarter. It plans to open 2,400 coffee shops this year, up from 2,190 last year.

Chairman Howard Schultz said new stores would be spread across many different markets, but added the company was adding outlets more aggressively in the Eastern United States.

Chief Executive Jim Donald said that even though store openings are at record levels, the company will be able to keep increasing new store growth beyond 2007.

"We're actually done with '07 working on '08. When you can get ahead of the curve that way you could open 20 a day," Donald said in an interview. "We could still continue to grow this on a per day basis."

To support its aggressive expansion, Starbucks has been adding more assistant managers and retail support staff in the United States. Store operating costs have risen because of an hourly wage increase for employees and the company is planning a wage increase for store managers in the current quarter.

Starbucks said the recent beverage price increase and the cancellation of an annual managers' conference would help offset those increased costs.

Store operating costs were 38.5 percent of company-operated retail revenue in the first quarter, compared with 38.2 percent in the same period last year.

Dan Geiman, an analyst with McAdams Wright Ragen, said those costs were higher than he expected, although they were offset by lower general and administrative expenses.

"In the end, it looks like everything is right where it should have been," said Geiman, who has a "buy" rating on Starbucks shares.

Starbucks said it still expects to earn between 87 cents and 89 cents per share for the year. Analysts are expecting earnings of about 89 cents per share.

The company expects same-store sales to rise between 3 percent and 7 percent this year and forecast overall revenue growth of about 20 percent.

Starbucks shares were up 1.1 percent at $35.32 in after-hours trading after closing at $34.94 on Nasdaq.

(Additional reporting by Alexandria Sage)

© 2007 Reuters