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Lower coffee prices spur Starbucks buying spree

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Starbucks Corp trumpeted the boost to its profits from "patient" coffee buying as it revealed that it had continued to use lower prices, now down some 40% from October highs, to build its inventories.

The coffee giant, unveiling well-received quarterly results, said that, thanks to standing back from the coffee market as arabica bean futures soared towards a two-year high of 225.50 cents a pound, its commodity costs would be "roughly neutral" for its current financial year.

Starbucks revealed in late January that a turn-of-the year buying spree had left it with 94% of its coffee needs fulfilled for the current financial year, which ends in September.

"Our coffee team's patience around coffee pricing paid off, resulting in our costs for fiscal 2015 being below average market prices," Kevin Johnson, the Starbucks chief operating officer, told investors late on Thursday.

'Close to 70% priced'

Mr Johnson added that the group had accelerated forward coffee purchases for its 2016 financial year too, as arabica prices have remained well below last year's average levels.

Futures hit 134.15 cents a pound early last month before staging some recovery, to stand at 141.25 cents a pound on Friday, on a front contract basis.

"Due to the recent drop in coffee prices, we have been locking in supply for [fiscal] 2016," Mr Johnson said.

The group was "now close to 70% priced for [fiscal] 2016 at prices somewhat favourable to [fiscal] 2015".

The extent of hedging represents a significant acceleration from that a year ago, when Starbucks said it had priced forward "more than 40%" of its coffee needs for fiscal 2015.

'Not as high as you might calculate'

However, Scott Maw, the Starbucks chief financial officer, signalled some caution on expectations of a significant drop in coffee costs for fiscal 2016.

While the group had "locked at slightly lower prices" for the next financial year, "that favourability, while meaningful, it is probably not as high as you might calculate based upon average market prices", Mr Maw said.

He added that, for the current financial year, "we actually did a really good job buying below the market.

"When we gave guidance all the way back in the summer, we expected coffee prices to come down, just given what we saw in the market.

"We waited, and we were patient. And when they [prices] came into our target range, we filled up our needs for the year."

Market reaction

The comments came as the group unveiled results showing a 16% rise to $494m in earnings for the January-to-March quarter, on revenues up 18% at $4.56bn.

Earnings per share came in at $0.33, only marginally ahead of Wall Street expectations for a $0.32-a-share result.

Nonetheless, Starbucks shares stood 4.8% higher at $51.775 in late trading on Friday.

Barclays raised to $50, from $45, its target price for Starbucks shares, with an "equal weight" rating, while JP Morgan lifted its target price to $42 from $45.50, with an "overweight" rating - setting something of a trend among brokers.

RBC, Credit Suisse, Jefferies, Stephens and UBS also raised their price targets on the stock. Jefferies and UBS were the most upbeat, foreseeing the shares hitting $57.

By Agrimoney.com

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