SBUX Preview: Declining Traffic the Norm

Starbucks (SBUX), the quick-service coffee chain, is scheduled to release third-quarter results and conduct its quarterly conference call after the market closes on Tuesday.

Analysts expect the company to earn 19 cents per share on revenue of $2.37 billion. In the year-earlier quarter, Starbucks earned 16 cents per share on revenue of $2.57 billion.

When Starbucks reported in April, it continued to show some improvement on a sequential basis. The company is trimming stores and cutting costs to try to rationalize its way back to growth. However, declining traffic and average ticket sizes are becoming the norm for the coffee chain.

According to the International Coffee Organization, average indexed coffee prices were $105.87 in March, $111.61 in April, $123.05 in May and $119.05 in June. I would note, however, that Colombian Mild Arabica coffee prices surged nearly 27% during the quarter, and Brazilian Arabica rose nearly 13%. No matter which way it's looked at, Starbucks is going to feel the pinch of coffee commodity inflation. Margins are likely to contract -- that is, unless Starbucks manages to contract for coffee at lower levels.

A rise in expected per-share earnings with a decline in expected revenue and margin contraction don't mesh in this analyst's mind. Either the company has some fancy brew to disclose in the quarterly results or the consensus estimates are nonsensical.

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Know what you own: Rothbort mentioned coffee chain Starbucks. Related companies are Green Mountain Coffee Roasters (GMCR), Diedrich Coffee (DDRX), Caribou Coffee (CBOU), Panera Bread (PNRA), Peet's Coffee (PEET) and Einstein Noah Restaurant Group (BAGL).

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At the time of publication, Rothbort had no positions in the 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.