Starbucks Corporation (SBUX) registered robust results for the fourth quarter fiscal 2011. Quarterly earnings increased 16% year over year to 37 cents a share. It slivered past the Zacks Consensus Estimate of 36 cents by a penny.
Management applauded the overall health and strength of the company’s global business. Moreover, product innovation and overall store experience fuelled same store sales growth. The ‘Good for You’ initiative that the company had been operating to attract customers has resulted in strong traffic gains across stores.
Revenues and Margins
Total sales for the fourth quarter jumped 6.8% to $3,031.9 million in the quarter compared with $2,838.0 million in the prior-year quarter, backed by 9% increase in global comparable stores sales, growth in Consumer Products Group revenues and the favorable impact of foreign currency exchange. Same-store sales benefited from higher number of transactions and average ticket growth of 6% and 3%, respectively.
Adjusted operating margin for the quarter expanded 60 basis points (bps) to 13.8% compared with the prior-year quarter, reflecting higher sales leverage, partially offset by higher commodity costs.
Segment Details
U.S. segment: Net revenue in the segment rose 11% to $2,029.8 million compared with fourth quarter 2010, attributable to a 10% growth in same-store sales. Same-store sales were driven by a 7% rise in traffic and a 3% jump in average tickets.
Adjusted operating margin in the U.S. segment jumped 210 bps to 18.4% from 16.3% in the prior-year period, reflecting increased sales leverage and the absence of restructuring charges in fiscal 2011, partially offset by higher coffee costs.
International segment: Net revenue surged 16% year over year to $717.9 million in the quarter, reflecting a 6% growth in same-store sales. The surge in net revenue consisted of a 5% increase in the number of transactions.
Adjusted operating margin at the International segment shrunk 40 bps to 13.0% in the quarter.
Global Consumer Products Group (“CPG”) segment: Net revenue surged 20% to $242.2 million in the quarter compared with $201.3 million in the prior-year period.
Operating margin at the CPG segment slipped 350 bps to 31.4% in the quarter compared with 34.9% in the prior-year period, largely due to higher coffee costs.
Looking Ahead
The company updated its fiscal 2012 earnings guidance to the range of $1.75 to $1.82, up 15% to 20% over the $1.52 EPS reported in FY11.
Starbucks has been focusing on foreign markets for additional growth. The company’s policy is unlike its rival Green Mountain Coffee Roasters (GMCR) which relies almost entirely on the U.S. market.
Starbucks has closed its joint venture deal with Tata Coffee Ltd., Asia’s largest publicly traded coffee grower. The coffee king entered the Indian market in January 2011 through an agreement with Tata. Seattle-based Starbucks plans to open 400 outlets outside the U.S. in 2011, in addition to those opened in China. The retail giant already has 16,800 stores in more than 50 countries. Notably, a major share of its revenues comes from non-U.S. locations.
The retail giant will offer coffee in K cups across food, drug, mass, special and department stores in the U.S. Management has also revealed that the K cups will be available in retail outlets like Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT).
Recommendation
Starbucks operates in a highly competitive market. Moreover, labor unions pose inherent risks for the company and the company’s high dependence on information technology also remains a concern.
Currently, we prefer to rate the stock as Neutral. Starbucks holds the Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.
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