U.S. Growth Makes Starbucks Results A Venti

Starbucks Corporation (NASDAQ:SBUX) announced its Q4 and fiscal 2012 earnings as strong same store sales growth combined with aggressive global expansion helped the company post strong results. Revenue climbed 11% to $3.36 billion while net income stood flat at $359 million or 49 cents a share. For fiscal 2013, the company raised the full year guidance of EPS in the range of $2.06 to $2.15 (up from the previous estimate of $2.04 to $2.14), which lifted market sentiment. Shares of Starbucks surged 10% after the results were announced. ^[1]

See full analysis for Starbucks Corporation

Strong Domestic Performance

Global same-store sales grew 6% helped by a 5% increase in customer traffic and a 1% rise in average transaction price. Same-store sales growth is an important measure to gauge the performance of a restaurant chain since it includes only the restaurants opened for at least a year and excludes the newly opened (and closed) restaurants, sales of which might be unusually low or high.

What was particularly impressive was the company’s performance on its home turf. Starbucks derives almost 70% of its revenues from the U.S. and posted same-store sales growth of 7% in the country. Achieving such a sales growth figure over a bigger base is tough and is a testament to the company’s initiatives gaining traction. Other restaurant chains like Dunkin’ Donuts, McDonald’s (NYSE:MCD) and Chipotle (NYSE:CMG) have posted much lower sales growth numbers in their recently announced earnings. Moreover, maintaining solidarity in its biggest segment adds stability to the company’s top-line as well as bottom-line.

Big Plans For The Future

There’s a lot going on for Starbucks at the moment which could help sustain or even accelerate current sales growth. In the U.S., the company is expanding its food offerings by testing a new range of croissants, muffins and loaf cakes. The move is a natural extension of Starbucks’ acquisition of La Boulange, a San Francisco-based bakery chain, for $100 million earlier in the year. Starbucks will also allow users to pay through their mobile phones beginning November through a technology developed by Square. Starbucks  formed a $25 million strategic agreement with Square in August. In October, the coffee giant also introduced its single cup brewer called Verismo, which is seen as the biggest threat to Green Mountain’s Keurig brewers.

Starbucks also opened its first outlet in India in October and the company expects the country to be one of its largest markets in the long term. The company now plans to accelerate store openings to around 1,300 in fiscal 2013 (i.e. from Nov’12 – Oct’13), up from 1,057 it added in the trailing 12 months. Americas and China/Asia Pacific will account for about 600 each.

Margins Expand

Company-reported operating margins widened by 0.6% to 15.4%. Starbucks does not break down margins for its company-operated and licensed stores separately, so it is hard to comment right now as to whether the margin expansion is attributable to an improvement in operational efficiency or a general increase in the proportion of licensed stores (or a combination of both). Licensed stores usually have margins three or four times those of company-operated stores, so a greater proportion of licensed stores will tend to widen overall margins (which could actually be misleading).

More than half of Starbucks stores are company-operated currently, but the company has shown a predilection to open a greater proportion of licensed stores lately. In the recently concluded fiscal, more than 60% of new stores were licensed. The trend is expected to remain the same for the next fiscal as well. This will have a natural tendency to widen the margins.

We have a $54 price estimate for Starbucks, which is about 10% higher than the current market price. However, we are in the process of revising our estimates to incorporate the latest earnings.

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