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Starbucks sees higher 2011 coffee costs

Jan 27 2011 07:21 Reuters

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Los Angeles - Starbucks Corp, the world's largest coffee chain, expects rising coffee prices to hit profits more than it previously thought and forecast full-year earnings below analysts expectations.

That news sent its shares down more than 2%, even as the company reported profits and US sales that handily topped Wall Street's targets.

Rising prices for restaurant food ranging from coffee and milk to beef and bread are pressuring restaurant operators.

Earlier this week Starbucks rival McDonald's Corp said it would raise prices "where it makes sense" to offset some, but not all, of the food cost increases.

Seattle-based StarbucksWednesday narrowed its earnings forecast to $1.44 to $1.47 a share for fiscal year 2011, compared with the average analyst expectation of $1.49 a share. The company expects commodity costs to cut earnings by about 20 cents this fiscal year, compared with its previous forecast of 8 cents to 10 cents a share in November.

Coffee represents 15% to 20% of Starbucks cost of sales, including occupancy.

The benchmark "C" arabica coffee futures contract trading on ICE Futures US remains around levels last seen 13-1/2-years ago, after surging nearly 80% in a rally that began in June 2010.

Late last year the company raised drink prices in the United States and China due to surging prices for coffee and other commodities.

Chief Financial Officer Troy Alstead told Reuters that the company is "fully locked" for fiscal 2011 - meaning it has bought all the coffee it will need for this year.

"I don't think you'll see what I'll call a new round" of price increases, said Alstead, who noted that the previously announced round of menu price hikes due to the cost of coffee has not yet shown up in every market.

Starbucks' coffee costs are higher this year than last, but still manageable, Alstead said on a conference call.

Profit jumps

Starbucks' profit for the fiscal first quarter ended January 2 jumped almost 44% from the year-ago period to $346.6m, or 45 cents a share. That easily topped analysts' average call for a profit of 39 cents per share for the latest quarter, according to Thomson Reuters.

Sales at Starbucks cafes open at least 13 months were up 8% in the United States and up 5% internationally for the holiday quarter, which traditionally is Starbucks' biggest for revenue.

Starbucks shares fell 2.6% to $32.20 in after-hours trading. The stock, which fell below $8 in November 2008 when Starbucks' overbuilding crashed into a US slowing economy, hit a 52-week high of $33.78 on Tuesday.

"There was a big beat in the quarter but they didn't raise guidance. I'm sure there is some digesting of that," William Blair & Co analyst Sharon Zackfia said of the share decline.

Smead Value Fund portfolio manager William Smead said speculators also were putting pressure on Starbucks shares.

"The stock's had an almost uninterrupted quadruple from the low," said Smead, who holds Starbucks in his portfolio.

Smead said the company put up great numbers for the quarter, but noted that the commodity outlook was "lousy if you bought (Starbucks) this week looking for a trade."

Option traders were expecting bullish news from Starbucks on Wednesday and were on the wrong side of that bet.

starbucks  |  coffee
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