Markets

Starbucks: Smell the Sandwiches

The coffee company's stock could bounce sharply either way following its earnings report after the market closes on Wednesday.

With earnings-reporting season in full swing, investors, as usual, are showing no mercy toward companies that disappoint.

No industry is safe -- witness the torpedoing of 3M, Aetna, Amazon.com and UPS, among others. Investors also torpedoed two restaurant stocks: sandwich and salad purveyor Panera Bread and Yum Brands, owner of KFC, Pizza Hut and Taco Bell. Their subpar earnings reports put the spotlight on Starbucks, which reports next Thursday.

Shareholders in the coffee-shop chain face two possible perils: Starbucks (symbol SBUX) could fail to reach the 17 cents per share that analysts, on average, expect the company to report for the June quarter (the third quarter of its fiscal year). Or the Seattle company could make less-than-enthusiastic pronouncements about some of its new ideas, such as serving warm food at breakfast and lunch. Since investors seem to be getting nervous about companies that depend on discretionary consumer spending -- and costly coffee falls into this category -- Starbucks needs to show the financial world that it has viable ideas for fueling growth beyond adding more stores and raising drink prices. Food seems to be a natural.

Earlier in July, Starbucks delivered news that suggested that it may be time for the stock to come off its caffeine high. On July 6, the company reported that same-store sales (revenues from restaurants that have been open at least a year) grew 6% in June. That sounds good, but analysts were hoping for 7%, so they interpreted this as a sort of profit warning. Between July 7 and July 14, Starbucks shares fell from $38 to $33.50, or 12%. Since then, the stock has treaded water. At $34, it's still up 13% for the year and toting a three-year average annualized return of 35%.

Now, none of the analysts who follow the company expect Starbucks' growth to start trending down dramatically. In fact, Citigroup's Glen Petraglia upgraded the stock from hold to buy on Thursday because, he said, the pullback in early July was an overreaction. But with Starbucks on record as saying it wants to generate earnings-per-share growth of 20% to 25% per year over the next three to five years and with the shares trading at 49 times the past 12 months' earnings, Starbucks is the type of stock that's apt to stumble if the company comes up even a little bit light on the numbers. That's not a sell warning, but a little caution to ingest with your daily latte.

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