Profit Percolates?

This is a partial transcript from "Your World with Neil Cavuto," July 22, 2004, that was edited for clarity.

NEIL CAVUTO, HOST: Let me ask you something. Have you been to a Starbucks (search) lately? The lines are out of this world, and so are the third quarter earnings.

The company posting $98 million, or 24 cents a share, up from $68 million, or 17 cents a share, in the same period a year earlier. Better than expected. But why is the market not responding to all of this good economic news? Let us ask Orin Smith. He is the president and the CEO at Starbucks, and he joins us from Seattle.

Mr. Smith, good to have you.

ORIN SMITH, PRESIDENT & CEO, STARBUCKS (SBUX): Thank you very much. Glad to be here.

CAVUTO: You know, you’re growing at an alarming rate. You are bucking, by and large, the Wall Street trend that tends to shrug its shoulders at even great news. But what do you think collectively is going on with the market, where it ignores great news?

SMITH: Well, you know, in some ways, I think with us, given the fact that this quarter, as good as it is, is really in keeping with what the last several quarters have been — so, in our case, maybe there is an expectation that this is going to continue for a while. And it’s already taken into account with the stock price, which over the last year or so has performed really well.

CAVUTO: It’s performed more than well as we take a look at a chart here. The question that always comes up, Mr. Smith, is how can you keep it going? I mean, there is a large short position in your stock are those betting it’s going to get beaten up because you trade at such a lofty level, I think close to 50 times earnings. And they say that that is simply unsustainable, it’s more than double the market average, unrealistic.

What say you?

SMITH: Well, it’s been there for the last 12 years. And a lot of shorts have paid the price for that kind of belief.

Our own view is not with regard to the stock market, because we don’t have any influence over that, but in terms of our performance levels, we are very optimistic that we can continue to grow over the next three to five years at the 20-plus percent that we’ve talked about now and have met as a goal over the last five years.

CAVUTO: But when you say you can grow at that clip, opening up, what is it, 1,500, 1800 stores? Someone told me, what, it was like three a day or three an hour, or something like that, right?

SMITH: Yes. Well, no, not three an hour yet. But it is more than three a day this year, and it’s going to more than four a day next year.

CAVUTO: Now, that is pretty aggressive growth. And other companies that have tried growth, even a fraction of that, and expanding operations, have rued the day, eventually. Why do you not worry about that, eventually?

SMITH: Well, first of all, we have been doing this at the 1,300 store level now four several years. And we are very comfortable with our ability to do that.

Now, this next year we’re going to bump it up to 1,500, but we’ve been working on putting the infrastructure in place to do that for a year now. So we prepare well in advance of when we undertake an addition like that. So that is well within the range of what is possible for us this next year.

CAVUTO: Can you fathom why people wait in line, and long lines at that, to get a Starbucks cup of coffee? I know the product is great. But you’ve got to wonder how the sanity of some of these people, don’t you?

SMITH: Well, you know, I’m one of those people who does stand in line. Because I...

CAVUTO: Oh, come on. You can get it delivered right to you. What do you mean?

SMITH: Oh, I can do that, too, but there are many times when I am out there and, you know, I don’t cut into the lines, and I don’t go behind the counter. I, you know, do the customers’ role, and I’ll stand in line because I do want that beverage.

CAVUTO: All right. Mr. Smith, if I were CEO, I’d cut the line. But good for you. Orin Smith, the Starbucks president and CEO. Appreciate it, sir.

SMITH: Great. Thanks.

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