Starbucks, the world’s largest coffee chain, has outperformed the Standard & Poor’s 500 Index by 17 percentage points since 14 October, while Arabica coffee for May delivery has fallen 37 per cent during the same period.
There’s a strong, inverse correlation between the relative performance of Starbucks’ stock and coffee prices because this commodity is “one of the biggest inputs” affecting its profitability, said Sara Senatore, an analyst at Sanford C. Bernstein in New York, who maintains an outperform recommendation on the shares. As a result, when prices fall, earnings improve because coffee represents as much as 20 per cent of the company’s cost of sales, she estimated.
Coffee is the most volatile commodity in the past year, driven by changes in weather in Brazil, the world’s biggest producer and exporter. After surging as much as 11 per cent to 2015’s high in mid-January, rains in Brazil improved crop prospects and prices are now at the lowest since February 2014. That followed the country’s most-severe drought in decades, which damaged crops in early 2014.
While Starbucks usually contracts its purchases of coffee beans and pays a premium to the futures-market prices, “when the price is attractive, the company tends to buy more,” Senatore said. “What Starbucks is paying for coffee correlates with what the commodity market looks like.”
Starbucks’ fiscal first-quarter profit rose 82 per cent as new food and drink offerings boosted sales and customer traffic rose 2 per cent at locations open at least 13 months in the Americas, the company said 22 January. The results were welcome news to investors, particularly the acceleration in traffic, Senatore said. The stock rose 6.6 per cent the following day, the biggest gain since July 2013.
Bloomberg News, edited by ESM
