Thursday, May 04, 2006

Forget Tea Leaves, The Future's In Coffee Cups

Link To This Post.
Forget Tea Leaves, The Future's In Coffee Cups.

Starbucks reported yesterday that sales for April were up, but the month-to-month increase was a smaller percentage than the company has experienced in more than a year, as reported by Reuters.

Some say it's perfectly understandable.
"Short-term investors may view a 6 percent comp as a hiccup," said ThinkEquity Partners analyst Nicole Miller, who has a "buy" rating on Starbucks shares and owns none. "We feel comfortable with that number."

Starbucks Chairman Howard Schultz said in an interview that the April figure was "artificially low" because the company's annual sale on brewing equipment happened in March this year and in April last year. That shift helped March results, when same-store sales rose 10 percent, he said.
Schultz's theory sounds like a good one. But what if something else is contributing to that slower growth rate?

What if the slowing sales are a result of consumer belt-tightening, a hint that the economy is about to turn south?

Think about what happened in April, which, by the way, was National Poetry Month, an event that usually funnels plenty of readers and writers into coffee shops to slurp and read. April saw the start of the meteoric rise in gas prices. It was also the month that millions of Americans filed their income tax returns, likely learning that the house they bought is providing less of a tax benefit than they anticipated. Also in April, foreclosures continued to shoot up nationwide. And, mortgage rates increased, further nailing shut the coffin of the refi boom.

What's all that mean? It means people are hurting. Homeowners are maxed out making those mortgage payments, in addition to the other bills. The cost of gasoline exacerbates that situation. It leaves less money for things people can learn to live without, like $4 coffee. (All of which also should explain in part why Starbucks is looking to start offering sandwiches.)

C'mon, folks. When people are selling blood plasma for gas money, they're brewing the coffee at home.

At this point, it is impossible to say if the Starbucks sales figures are just a hiccup, or a harbinger of bad times to come. I will, however, keep a keen eye on the May, June and July numbers to see if a trend emerges.

-- The Boy in the Big Housing Bubble