Starbucks' numbers better but not grande

Starbucks investors perked up Wednesday after the company announced a third-quarter profit of $158.3 million, or 21 cents a share.

It wasn't a stellar quarter by Starbucks' historical standards, and executives were careful not to promise a stunning comeback.

But shares rallied anyway as investors weighed the stock's 23 percent decline this year against the company's prospects.

"Overall, it was a relief for investors," said Dan Geiman, an analyst at McAdams Wright Ragen in Seattle. "Expectations have been taken down a few notches over the last few quarters, so some were probably expecting worse."

Shares rose 52 cents to $27.20 in regular trading before the earnings report, then 40 cents more to $27.60 in after-hours trading.

Starbucks gave investors their first glimpse of what to expect in the coming fiscal year, including 2,600 new stores worldwide, sales growth of about 18 percent and per-share profit growth of 20 to 22 percent.

That's slower growth than some had hoped, and one analyst asked during a conference call whether the slowdown is permanent.

"We don't expect the bottom-line growth rate to reaccelerate up to the 25 percent level again, but it's certainly not impossible," said Chief Financial Officer Michael Casey.

Chairman Howard Schultz added that Starbucks is affected by "the law of large numbers," meaning it is difficult to keep posting high-percentage growth when the underlying sales and profits are higher.

Sales for the third quarter were $2.4 billion, up 20 percent from a year ago. But higher costs, for milk in particular, held profit growth at 8.8 percent.

Starbucks increased the price of its drinks by an average 9 cents in U.S. stores this week to cover escalating milk costs for the fourth fiscal quarter, Casey said.

Milk prices have hurt the sales of bottled Frappuccino and DoubleShot in the U.S., Starbucks Chief Executive Jim Donald said in an interview after the conference call.

"We're seeing that retailers are pricing up to cover those higher costs, so some of that is creating that softness in sales," he said.

Same-store sales, a key figure investors watch closely to determine whether retailers are reaching market saturation, were 4 percent for the quarter, unchanged from the second quarter but down from 6 percent a year ago.

Company-operated stores in the U.S. grew their transactions by less than 1 percent, which some people considered good news.

"It was a little better than the March quarter and seems to be stabilized," said Sharon Zackfia, an analyst at William Blair in Chicago.

She expects profit margins to improve in the next fiscal year after a difficult few quarters this year.

Starbucks' operating margin — its operating profit, expressed as a percentage of sales — fell slightly in the third quarter to 10.4 percent from 10.9 percent a year ago.

Zackfia said she and other analysts had expected Starbucks to pay a higher tax rate in the quarter. If it had paid the 37 percent rate as expected, it would have missed analysts' expectations by about a penny.

Instead, it met analysts' 21 cent-per-share forecast as measured by Thomson Financial.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com