Starbucks Seeks Return to Prominence

For Rothbort's preview heading into the Starbucks conference call, please click here.

Starbucks (SBUX - commentary - Cramer's Take) no longer has the zing to deliver big upside movements on earnings reports. In fact, the reaction to Wednesday's results was subdued.

The company is desperately trying to regain some prominence as a growth quick-service establishment although management doesn't characterize its company as a QSR.

Margins picked up slightly during the fiscal second quarter but still declined year over year and in my opinion it will be hard for the company to try to pass along price increases. I don't buy the assertion that Starbucks hasn't lost market share and that customers haven't traded down.

I am, however, impressed with the company's cash flow and debt reduction. Now all the company has to do is finally get itself rightsized, which I believe will still take well more than a year to accomplish.

Starbucks reported second-quarter pro forma earnings of 16 cents a share, excluding 13 cents of restructuring charges, on net revenue of $2.3 billion. Same-store sales declined 8% during the period, as traffic fell 5% and average ticket fell 3%. U.S. sales declined 7% and international sales declined 12% from a year earlier, with the later being negatively impacted by the stronger U.S. dollar.

Starbucks is beginning to see early signs of progress in terms of margins and traffic on a sequential basis. The company will institute $500 billion of cost reductions in fiscal 2009. The introduction of the VIA instant coffee product has been successful so far. The $3.95 breakfast "pairing" was introduced in the U.S. with positive customer response.

CEO Howard Shultz made the claim that the company isn't losing market share and that customers aren't trading down. His statement was qualitative, not quantitative, so we have to take those claims with a grain of salt. Starbucks is lowering prices on some popular items such as tall lattes and increasing prices on other beverages.

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At the time of publication, Rothbort had no positions in any stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.