Starbucks: The Turnaround Continues

One of the best investment opportunities is the Turnaround Stock. The major problem with the Turnaround Stock is that the real deal is very, very hard to find.
In business, success breeds complacency. You see it all the time. Lots of good companies find themselves running into trouble, and soon they start losing market share and watching their profit margins fall. Once trouble comes, it’s not hard for a company to announce a restructuring effort, but it’s very hard to pull one off. What’s worse is that shareholders are notoriously impatient and that often hinders a turnaround effort.
I like to follow Starbucks (SBUX) because it’s a very good example of a company facing their problems and doing something bold about them. The company greatly over-expanded and soon, their same-store sales started to fall. Starbucks fired the CEO, rolled up its sleeves and dramatically cut back on the numbers of stores.
Earnings-per-share peaked in 2007 at 87 cents, then fell to 71 cents in 2008 and rebounded to 80 cents in 2009. The stock plunged from $40 in 2006 to just $7 by November of 2008. That’s the kind of thing shareholders tend to notice.
Well, Starbucks has come a long way. The company just reported earnings and business continues to improve. The company earned 29 cents a share for their fiscal Q2 compared with 16 cents a year ago. The details of the report are pretty good. Net revenues rose 9%. Compared stores sales increased 7%. Most impressively, SBUX’s operating margin rose from 10.4% a year ago to 17.8% this year. Whenever you find expanding margins, take notice!
Starbucks also said they’re increasing their full-year guidance (which is already half over) to $1.19 to $1.22 a share. This is the second time they’ve raised full-year guidance. In November, Starbucks said to expect 92 to 96 cents a share. Then in January, they said to expect $1.02 to $1.05 a share. I like this trend.
Let’s think about this. In November of 2008, SBUX was going for less than nine times what the company earned between September 2008 and September 2009, and less than six times what they’ll probably earn in the 12 months after that. The company also recently paid out its first-ever dividend.
The shares are now up more than 250% from their low 18 months ago. If anyone needs me, I’ll be kicking myself for missing this one.

Posted by Eddy Elfenbein on April 22nd, 2010 at 7:49 am

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