Starbucks (SBUX) shares are feeling a serious caffeine hangover Friday, sinking more than 10% after the company's first earnings miss since December 2008, and a lowered outlook that follows other recent disappointments from chain eateries Chipotle (CMG) and McDonald's (MCD). According to FactSet data, this marks the seventh-worst one-day percentage loss so far in the Seattle-based coffee leader's 20-year history as a public company; it's been 12 years since shares saw such a lousy day.
The company's U.S. same-store sales increased 7%; global comparable store sales were up 6%. Currently the stock has a PE ratio of 27, according to Yahoo! Finance data.
The stock, which had been up close to 14% for the year before the miss, began its slide after hours Thursday following its report of 43 cents per share earnings -- two cents below average analyst expectations -- and revenue of $3.3 billion, a significant growth of 13%. But when you are the coffee king and expectations run high, that kind of growth may not be enough. Chipotle's sales growth was also very strong but just not enough for investors. And this rare Starbucks miss and lowering of guidance could bring back fears that this java king could stumble again, as it did a few years ago at the height of the financial crisis.
[Related: Chipotle Smoked as Sales Miss Estimates]
As CEO Howard Schultz noted on the earnings call, "The financial global economy, uncertainty in Europe, high-end appointment in the U.S. and resumed decline in home sales and further diminished consumer confidence did have an impact on our business in Q3."
A roundup of analyst estimates on MarketWatch showed several of them cutting their price targets on the stock as it sank Friday, although no analyst has set a "sell" rating on it.
Slowing Economic Growth
The morning following Starbucks' disappointing report, we got the first pass at U.S. GDP for the second quarter of this year, which showed growth slowing to a rate of 1.5%, down from 2% in the first quarter (but still better than expected). Weak consumer spending is a major culprit in growth decline, and Starbucks' report noted a traffic decline in its U.S. stores in June and July. Will a consumer pullback amid serious economic concerns at home and abroad mean indigestion for the restaurant sector going forward?
Nick Setyan, a restaurant analyst with Wedbush Securities, points to some recent strengths amid the weaknesses. He notes that McDonald's and Starbucks are being impacted chiefly by continued weakness in the European market. But "when looking at the U.S.," he says, "while Chipotle disappointed, pointing to the economy as the culprit, and Starbucks did say their trend slowed down in June, Panera Bread (PNRA), Buffalo Wild Wings (BWLD) and BJ's Restaurants (BJRI), for example, all reported very solid comparable sales growth."
Buffalo Wild Wings did miss on EPS but saw a hefty year-over-year revenue increase. Notably, the risk from higher wing costs is what seemed to hit the EPS; wing costs have been on a slow rise since hitting a low in Q2 of 2011, largely due to high demand. Setyan noted that the current Midwest drought, which is expected to hit U.S. poultry prices the earliest, won't affect wing prices, as they are "are an entirely different animal from chicken breast prices."
It remains to be seen what overall effect the drought could have on restaurant prices and operating costs, but the USDA sees a possible drought-related impact on food prices coming as soon as late 2012.
For both Chipotle and Starbucks, Setyan thinks their big-kids-on-the playground status factored in the hit to their shares following earnings: "I think the reality of it is that expectations for both Starbucks and Chipotle got ahead of themselves."
On the earnings call Starbucks CFO Troy Alstead noted that its business in Europe, amid the economic crisis there, was the most challenging for the company.
"The European economy is extremely challenging, and perhaps worsened during the quarter," he said. "We are currently conducting a more thorough portfolio review … [and may] potentially close more stores in Europe over the next few quarters, beginning in the fourth quarter."
Another Food-Centric Relief
Whole Foods (WFM) was one other recent food-centric relief for nervous investors. After sinking 7 percent following Chipotle's earnings burn -- on concern that the customers who were pulling back the spending there would do the same at the high-end supermarket chain -- the company reported earnings that beat the Street; the stock erased all Chipotle-fueled losses and then some following the report, although it's slipping slightly in later trade as the week closes.
Dunkin' Donuts (DNKN), a direct Starbucks competitor, also saw it shares slip Thursday following an earnings report that matched expectations. Again, it seems investors wanted more than just "OK" for this major brand.
Aside from this recent miss, Starbucks has been looking at a pretty strong year, and the stock has been a good performer. In March shares actually hit an all-time high (split-adjusted) of $50 right before announcing it would enter the single-serve space to challenge market leader Green Mountain (GMCR) -- which has seen very tough times in 2012 -- with its own brewing machine, Verismo, due at year-end. The company is also looking toward growth in areas that have a different angle from the coffee-centric business it's known for; Starbucks recently launched Refreshers, a line of fruit drinks, and also made its largest acquisition yet with the $100 million cash purchase of San-Francisco-based Bay Bread and its La Boulange brand, in an attempt to meet demand for tastier food options at their stores.
Starbucks also plans to open 1,200 new stores next year, most throughout the U.S. and China. In an appearance on CNBC, Schultz noted that China was still a strong area of growth, with"double-digit comp store sales" and "double-digit traffic."
So the growth markers are there for Starbucks -- the question is, can they keep that growth going?