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Friday, October 13, 2006

Analyzing Starbucks (SBUX)

By Yaser Anwar, CSC of Equity Investment Ideas

After disappointing same store sales in July and August, Starbucks posted a phenomenal 6% for September, well above consensus expectations of 3.2%. Multi year trends showed a sharp increase relative to the summer months.

I believe September’s results to be reflective of some economic relief felt by consumers during that month, akin to the pressure felt by the consumer over the summer as oil prices rose.

The improvement could also be partially attributed to cooler weather mitigating the cold, blended drink bottle-neck issue first identified in July.

I expect retail revenues to increase about 23% in 07, due to expansion and average unit growth of about 4-5%. Investors should look for specialty revenues growing about 20%, primarily due to increased royalty revenues and a further significant increase in licensee stores.

Espresso beverages, alongside bakery and lunch were among top contributors to September results. September’s seasonal relaunch of the Pumpkin Spice Latte was also well-received.

SBUX has expanded its retail business by increasing its share in existing markets and opening stores in new markets in which it sees an opportunity to become the leading specialty coffee retailer. SBUX opened a total of 1,040 company-owned stores in 06, and plans to open a similar number in 07.

However, investors should not assume that September’s strong number sets a precedent for 07, the multi-year acceleration is encouraging and I expect recent pricing action to provide a bit of a cushion.

SBUX anticipates annual revenue growth of 20-25% over the next 3-4 years.

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