Starbucks perks up on hotter outlook

Shares jump after Credit Suisse raises earnings expectations for the coffee chain.

By TheStreet Staff Oct 12, 2010 1:44PM

thestreetCredit: (© Michael Conroy/AP)
Caption: Customer in a Starbucks storeBy Miriam Marcus Reimer, TheStreet

 

Starbucks (SBUX) shares jumped Tuesday after an analyst from Credit Suisse raised his earnings on the coffee chain.

 

Credit Suisse analyst Keith Siegner expects Starbucks to earn $1.45 per share in 2011 and $1.69 per share in 2012. The consensus call among Wall Street analysts polled by Thomson Reuters is for earning of $1.43 and $1.63 next year and the year after, respectively.

 

Siegner raised his estimates based on improved margins and expected earnings-per-share growth in the coming quarters. He maintained his "outperform" rating and $34 price target on Starbucks shares.

 

The coffee purveyor's stock was rising 4.1% Tuesday afternoon, to $27.05, on heavier-than-average volume.

 

Last month, Starbucks announced it would raise prices on some of its menu offerings to offset rising commodity costs.

The company said the increases would be targeted to "certain beverages in certain markets" in response to the recent jump in the price of green arabica coffee, which it said was close to a 13-year high. It also noted volatility in the cost of other key ingredients, such as sugar, dairy products and cocoa, as a factor in its decision.

 

The move echoed that of fast-food operator Wendy's Arby's Group (WEN), which said earlier last month that rising commodity costs would hit its restaurants in the third and fourth quarters of this year. Wendy's expects a 2% to 3% commodity increase for fiscal 2010.

 

Higher raw food costs would likely undermine profit margins, as fast-food restaurants are hesitant to raise prices in a weak economy, according to Wendy's CFO Stephen E. Hare.

 

Starbucks left open the chance that it could make further adjustments to its pricing, saying it would continue to monitor green coffee prices closely and that it "could not rule out the possibility" of lifting the price of its packaged coffee products in the next few months.

 

In a show of confidence that these moves would be enough to offset the higher ingredient costs, Starbucks reaffirmed its outlook for earnings of $1.36 to $1.41 per share in its fiscal 2011, which ends in September of next year.

         

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