Cost of Coffee Could Squeeze Starbucks

Although Starbucks’ (NASDAQ:SBUX) is reporting strong revenue growth, the rising price of coffee is putting a squeeze on operating margins.

Total revenue for the world’s largest coffee chain was up 16 percent year-over-year last week to $3.44 billion, with net income up more than 10 percent to $382 million. However, revenue has been bloated somewhat by three factors: the addition of juice company Evolution Fresh, the changeover of European joint ventures to company-owned outlets and the use of the direct distribution model to recognize full earnings from packaged coffee and tea sales. Starbucks’ revenue growth was actually less than 8 percent when those three factors are discounted.

On top of that, the company has reported the Cost of Goods Sold as a percentage of revenues has increased in all segments. In CAP and EMEA regions, Cost of Goods Sold makes up nearly half the total revenues. Starbucks buys its coffee through fixed-price and price-to-be-fixed contracts, the latter of which has its price decided by the company or the supplier, making further price increases — and more pressure on the company‚Äôs profit margins — a real possibility, according to the report.

Here’s how Starbucks shares closed today:

Starbucks Corp. (NASDAQ:SBUX): SBUX shares recently traded at $48.24, up $0.32, or 0.67%. They have traded in a 52-week range of $31.17 to $48.62. Volume today was 8,271,069 shares versus a 3-month average volume of 5,949,360 shares. The company’s trailing P/E is 28.89, while trailing earnings are $1.67 per share.

To contact the reporter on this story: Gina Smith at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com