When a company is prefectly 'efficent' they are bogged down by any change in production costs, they do not have any "Inefficency" to curb and contain cost- Starbucks is an example
Starbucks Squeezed by Dairy Prices
By William Spain
CHICAGO (Dow Jones) -- Shares of Starbucks fell to a 20-month low Thursday after the coffee chain's chief financial officer said meeting the top end of its 2007 profit target will be "very challenging."
The company had set a range of earnings of 87 cents to 89 cents a share for the year, but CFO Michael Casey, speaking at a conference in Chicago, cited "rising dairy costs and soft transaction growth" as factors that are weighing on the bottom line.
Starbucks shares (SBUX) closed lower, falling $1.06, or 3.8%, to $26.26 in heavy trading volume that was roughly triple its average. The stock has been on a slow but steady skid since cracking the $40 mark late last year.
Starbucks added that it plans to open 2,400 new stores this year and is targeting 20% revenue growth and a same-store sales rise of 3% to 7%.
David Tarantino of Robert Baird cut his price target on the stock following the news while trimming his earnings per share outlook to reflect the higher cost assumptions.
"While disappointed to be lowering estimates, we maintain our outperform rating," he wrote to investors. "We believe pressure from dairy prices is a transitory issue that is masking a solid underlying outlook for [the second half].
The current valuation makes for "an attractive entry point for a compelling growth story that includes substantial long-term prospects . . . .high returns on capital, and healthy balance-sheet and cash-flow characteristics," he added.
Finally, "we expect sentiment to improve as [Starbucks] demonstrates ability to achieve good results in upcoming periods . . .despite external headwinds."