What is the situation?
Starbucks dropped from about $62/Share to $50/Share in a matter of three and a half months from middle of April through just about the end of July. Coincidentally, the Dow Jones and Nasdaq also dropped significantly from April through just about June. This explains the drop from April through June. But, after yesterday's stellar earnings release, SBUX dropped an additional 11% to about $46/Share today. That is a total of $16/Share.
Fiscal Third Quarter 2012 Highlights:
- Total net revenues increased 13% to $3.3 billion
- U.S. comparable store sales increased 7%; Global comparable store sales increased 6%
- Channel Development revenues increased 45% to $316 million
- Operating income increased 22% to $492M; operating margin expanded 120 basis pts to 14.9%
- EPS increased 19% to $0.43 per share, compared to $0.36 per share in Q3 FY11
- Starbucks opened 231 net new stores globally, including its 600th store in mainland China, and its first stores in Finland and Costa Rica.
Why did it drop so much?
The long and short of it is that Starbucks management missed their Q3 targets they expected in Q2 and as a result also cut their Q4 2012 forecasts. They cited "difficult economic environment all global retailers are confronting today" for the primary reason.
How much did they missed their EPS by and cut the forecast by?
In FY12 Q2, management's earnings release stated that they expected $0.45 to $0.46 EPS in FY12 Q3 and $0.46 to $0.48 earnings per share in Q4. Evidently, yesterday's earnings release stated that their Q3 EPS was only $0.43. This is about a 3 cents difference or a $24M dollar difference in 'Net Earnings attributed to Starbucks'. Part of this is due to their acquisition of La Boulange® Bakery, which was expected to dilute EPS by 2 cents. They slashed their Q4 EPS from $0.46 to $0.48 to $0.44 to $0.45.
What does cutting the Q4 forecast ultimately mean?
By taking the average change in 'Weighted avg. shares outstanding - diluted' from FY11 Q4 to FY12 Q1 (-1.2M), FY12 Q1 to FY12 Q2 (-13.9M), and FY12 Q2 to FY12 Q3 (22.2M), we arrive at approximately 2M share increase quarter over quarter. For estimating purposes, let us assume a constant 'Weighted avg. shares outstanding - diluted' in Q4. That is the Q4 FY12 'Weighted avg. shares outstanding - diluted' will be the same as Q3 FY12 or 776.8M.
If we calculate the difference between management's forecast in Q2 and adjusted forecast in Q3 for Q4 EPS, it is a difference of $12M to $23M difference in 'Net Earnings attributed to Starbucks'. In other words, we expect Q4 'Net Earnings attributed to Starbucks' to be $12M to $23M less than what they forecast in Q2. This is about 5% to 7% of Q3 'Net Earnings attributed to Starbucks'.
Using the new forecast numbers, assuming 'Weighted avg. shares outstanding - diluted' remains constant, the we expect Net Earnings of about $341.8M to $349.6M in Q4.
This is significantly lower than FY12 Q1 and FY11 Q4 of $382.1M and $358.5M respectively. Historically of the two quarters, Q4 has been stronger than Q1, so this is reason for concern.
However, assuming management meets their target of $.45 EPS in Q4 2012, the year EPS will be 1.78 versus 1.62 from prior year.
|From the SBUX 2011 10K|
- Forecasting lower EPS for Q4 2012 than Q1 2012 and Q4 2011
- About an estimated $16M to $23 less in Net Earnings comparing Q2 forecast to Q3 forecast
- 4% to 7% as a percentage of Q3 Net Earnings
- Assuming management meets their target of $.45 EPS in Q4 2012, the year EPS will be 1.78 versus 1.62 from prior year.
Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.
Disclosure: I have no position in SBUX as of this post, but may initiate a position within the next 24 hours.
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