Starbucks (SBUX) raised its dividend by 24% with better-than-expected earnings and in-line revenues. Total revenues rose 13% to $3.8 billion and EPS rose 37% to 63 cents, higher than consensus expectations.
It’s all great news for a company that has had several market forces in its favor. Popularity in Asia, market saturation in America, and declining costs have all helped SBUX widen its operating margin, while expansion of the Teavana brand and forays into consumer packaged goods give it plenty of growth potential in the future. So why did the stock go down in after-hours after the release, and stay low in the next day’s morning trading?
While the past’s numbers were great, forward guidance was for EPS of $2.55-$2.65 for 2014, which was below analysts’ expectations of $2.67. This spooked investors, causing the stock to fall by as much as 3% in after-hours trading.
However, the stock quickly recovered and was quite a bit higher by the end of Thursday’s trading. Those gains have been largely erased on Friday, with a steep drop off in volume that may suggest a return to equilibrium for the stock for next week.
The volatility of the past two days reflects a market debate over whether SBUX deserves its P/E ratio over 30 amidst a very slight decline in total EPS growth. In this debate, it is important to consider management’s choice in setting this forward guidance where they have. Fortunately, CEO Howard Schultz discussed this point in great detail on the earnings call. I’ll quote him directly:
“It seems like we can’t get through our conference call without somehow this tension between us and you with regarding to comp growth guidance. But let’s just try and establish common language so there’s an understanding about what it is we’re trying to do and what it is we’re trying to guide. Last quarter we had a 9% comp in the U.S. business and I had said then as I think we’re trying to say now that was an 8% comp this quarter and it would be just irresponsible of any of us at Starbucks to project to you or guide you to that level. Now, do we have aspirations to try and do it again as we did this year? Absolutely. Do we think we can? Many of us think we can but we’re not going to sit here and put a number out there that is such a stretch target and have you put it in your model. And then we come up with a 6 or 7 which gets our peer group as stunning and incredible and then you write reports that says we’ve disappointed. That’s not going to happen. So the guidance we’re giving is the most responsible guidance we could possible provide you especially when you consider the maturation of our store base and the number of stores.”
In other words, by setting the bar conservatively, Schultz has told analysts that they are ensuring that they will not disappoint when offering comparable sales growth that outperforms the market sector.
This is a substantially important point. Fundamentals investors need to remember the Keynesian beauty contest—when you are investing, you are investing not only in fundamental value, but in the relationship between that value and the market’s perception of that value. If the market perceives that value as higher than it actually is, you sell. If the opposite, you buy. Forward guidance is an important component, because it sets the bar for perception, while actual sales figures remain the thing being perceived.
In the case of Starbucks, the debate over just how important this perception is to the company’s value seems largely settled. For now. But the debate will come back in January when Schultz again reports revenue, earnings, and expectations for the future.