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Starbucks Earnings Rise 31%

The stock sinks slightly despite raised 2005 guidance.
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Updated from 4:52 p.m. EST




reported record sales and earnings for its first fiscal quarter of 2005 Wednesday, and raised its earnings outlook for the full year.

The ubiquitous chain of coffee shops said its quarterly earnings rose 31% to $145 million, or 35 cents a share, up from $110 million, or 27 cents a share in the same period a year earlier.

The results beat Wall Street's expectations by a penny, but the shares were recently down $1.48, or 2.7%, to $53.86 in after-hours trading. The stock closed up $1.34, or 2.5%, to $55.34, roughly 47 times its raised earnings guidance.

"Starbucks' first quarter was built around our holiday promotion, which included our popular seasonal beverages, strong customer response to Starbucks Christmas Blend, and relevant gift options ranging from Starbucks Cards to Starbucks Hear Music offerings," said the company's new chief executive designate, Jim Donald, in a statement. "This exciting line-up resulted in our strongest holiday ever."

Donald was recently chosen by Starbucks to succeed president and chief executive Orin Smith, who has run the company since 2000. Smith plans to retire in March.

Sales at the Seattle-based java giant increased 24% to $1.6 billion from last year's $1.3 billion. The top-line was powered by the opening of 642 new retail outlets during the quarter, along with an increase in same-store sales, those at stores open for at least a year, of 10%, compared to the year-ago period. That exceeds the company's target of 3% to 7% same-store sales growth.

Based on the strong results, Starbucks raised its earnings outlook for 2005 to a target range of $1.15 to $1.17 a share, excluding the impact from expensing stock options. Previously, the company was targeting a range between $1.12 to $1.15 while Wall Street expected full-year earnings of $1.17 a share, according to consensus estimates reported by Thomson First Call.

In a conference call with analysts, the company's chief financial officer, Michael Casey, said it was in the process of assessing the effects of new accounting rules regarding the expensing of stock options. The rules will be adopted no later than the fourth quarter, and Casey plans to outline the effects of the changes sometime before then.

During the first quarter, the company said its operating earnings increased 30% to $227 million, compared to last year's $175 million. Operating margins increased to 14.3% of total net revenues, as strong revenue gains were only partially offset by higher retail store operating expenses.

In 2005, Starbucks expects to expects to open about 1,500 new stores on a global basis in fiscal 2005, with 550 new company-operated locations and 525 licensed locations in the U.S. and 100 new company-operated stores and 325 licensed stores in international markets.

Wall Street's negative reaction to the company's stellar performance reflects the company's high valuation in the face of concerns about rising prices for coffee futures, and expectations for slowing growth rates in the coming years. Starbucks shares trade at roughly 59 times earnings, a considerable premium to more traditional valuations in the food and beverage chain space. The company has earned its high price due to its aggressive growth rates and successful track record, but there is growing skepticism about how long its performance can continue.

Coffee futures rose 60% last year, and Starbucks was already forced to raise prices by 11% last October. The higher prices showed little impact on demand for the company's products, but there is no guarantee that further inflation would have the same success.

Furthermore, analysts say the company is approaching market saturation levels in U.S. markets, leaving international markets, like Europe, as its main growth driver. While the Starbucks business model has demonstrated its appeal in the U.S., some investors have doubts that its popularity will spread with the same vigor overseas.