SBUX Preview: Significant Cost Savings

Starbucks (SBUX - commentary - Trade Now) is set to report earnings after the close on Thursday. Consensus estimates are for EPS of 21 cents on revenue of $2.39 billion. Starbucks has topped estimates in each of the past two quarters, and I would think there would be at least a penny or two of upside again this time around as the company has realized significant cost savings.

Starbucks saw customer traffic slow considerably during the recession, such that it embarked on its first array of store closings as it felt some areas had too many locations. The company originally slated 800 stores for closure, and it should complete all of them by the end of the year. I will be listening for commentary as to if the company can quantify the effect that store closings had on the surrounding units.

The company appointed a new Chief Marketing Officer during the quarter, which it hired away from PepsiCo (PEP - commentary - Trade Now). She helped launch a rare TV ad campaign to promote Starbucks' new single-service coffee packets, called Via. I am no coffee expert, but I tried on and thought it was good. The campaign just launched at the end of September, but I hope to hear some insight as to how sales fared during October.

Analysts are looking for same-store sales to show a 2% decline, which would be a sequential improvement from last quarter's 5% decline showing. Continued progress on the cost-cutting front is expected to benefit operating margins, and I have seen estimates ranging from 11% to 13%. The company raised some prices in August, while lowering the prices on other drinks. It will be interesting to see what the net impact on pricing has been.

In terms of guidance, the company will likely reiterate its previous fiscal 2010 EPS guidance for growth of 13 to 18%. Any indication of flat comps for next year would be a positive as well. Starbucks has not repurchased any shares in the past six quarters, nor does it pay a dividend, and investors might wonder if the company has plans for its growing cash hoard.

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At time of publication, Kahn had no positions in the stocks mentioned.

Jordan Kahn, CFA, is a portfolio manager with Beverly Investment Advisors, a Beverly Hills, Calif., money manager. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Kahn appreciates your feedback; click here to send him an email.