Starbucks Loses its Caffeine Buzz

Starbucks (NASDAQ:SBUX) posted second-quarter earnings after the bell on Thursday that came in a penny above estimates. However, after Starbucks disclosed that high commodity prices were taking their toll on costs and putting pressure on the bottom line, its stock was under heavy selling pressure in the after-hours session.

The coffee giant posted net income of $309.9 million, up 18.5 percent from a year ago. In a per share basis, Starbucks earned 40 cents, just a penny above the consensus estimate. While its operating margin was flat at 13.5 percent, operating income expanded 14 percent to $430.4.

Starbucks’ global comparable store sales were up 7 percent, with traffic increasing 6 percent and the average ticket up 1 percent. This was attributed to high-growth in the China/Asia-Pacific region, with comparable store sales increasing 18 percent, traffic up 14 percent, and the average ticket up 4 percent. China saw growth topping 20 percent for its seventh consecutive quarter. The Americas were Starbucks’ biggest region by revenues, and the region saw growth by 8 percent, traffic increased 7 percent, and the average ticket up 1 percent.

Starbucks opened 176 net new stores, including the 3,000 stores in the China/Asia-Pacific region. Net revenues came in at $3.196 billion, up 14.7 percent from the same period a year ago.

However, investors seemed concerned over the company’s margins. Commodity cost pressure, fundamentally high coffee prices, made up for $63.5 million from operating income, resulting in a 200 basis point hit in margins.

Despite an increase in margins growth — up 10 and 660 basis points, respectively, to 19.5 percent and 39.8 percent — for the U.S. unit and the CAP unit, Starbucks’ channel development segment took a huge hit, with margins down 740 basis points to 25.4 percent.┬áThese segment groups products include the company’s K-Cups used in Green Mountain Coffee’s (NASDAQ:GMCR) Keurig brewers, Starbucks’ Verismo single-serve system, and their packaged coffee business. The unit still saw revenue growth of 57 percent to $321.5 million.

Starbucks raised its full year earnings estimate to $1.81 to $1.84 per share, updating its guidance. Revenue growth is expected in the low teens, with mid single digit comparable store sales growth. The coffee giant kept its 50 to 100 basis point operating margin expansion forecast. Starbucks announced it expects commodity costs to add about $230 million of cost pressure.

Last quarter, margin pressure was a similar issue for the coffee chain. However, Starbucks is depending on strong growth from China and the development of new products and businesses through its channel development segment to continue growing its top line and expanding margins. This should feed the bottom line.

As the coffee giant turns to brewing and single-cup segment, rivals are licking their chops in hopes of getting in on a piece of Starbucks’ action. Starbucks should be on the lookout for Dunkin’ Brands (NASDAQ:DNKN), showing interest for aggressive expansion in the United States. Simultaneously, McDonald’s (NYSE:MCD) has been progressively moving into the segment, while in China, Starbucks should be wary of Yum! Brands (NYSE:YUM), which derives much of its growth from the world’s second biggest economy.

All in all, investors were not too pleased with the company’s results, pushing the stock down violently in after-hours trade on Thursday and further still in early trading on Friday.