Starbucks Corporation (SBUX) reported earnings of 46 cents per share for fiscal fourth quarter 2012, which beat both the Zacks Consensus Estimate of 45 cents as well as company expectations. Starbucks was expecting to post earnings within a range 44 cents to 45 cents in the quarter. Earnings increased 24% year over year due to solid-top line growth and margin expansion.
Adjusted quarterly earnings included a 2 cents charge for store portfolio optimization initiatives in Europe.
Following the solid fourth quarter results, Starbucks upped its forecast for earnings, operating margins and global net new stores for fiscal 2013. Starbucks also increased its quarterly dividend rate by 24%.
Revenues and Margins
Total sales for the third quarter increased 11% year over year to $3.4 billion, in line with management expectation of posting growth in the range of 10%-12%. The sales growth was driven by strong global same store sales, improving revenue trends in U.S., strong growth in China and continued momentum in the Channel Development segment. The quarterly revenue was almost in line with the Zacks Consensus Estimate of $3.39 billion.
Same-store sales, which exclude the impact from new company-operated stores opened in the past 13 months, grew 6% benefiting from consumer traffic growth. In the quarter, the company opened 415 net new stores all over the world, including its 700th store in China, Starbucks’s key market.
Adjusted operating margin increased 160 basis points to 15.4%, driven by top-line growth and solid operating margins in Americas.
Segment Details
Starbucks operates through the following segments: Americas (inclusive of the US, Canada, and Latin America); Europe, Middle East, and Africa (EMEA); China-Asia-Pacific (CAP); Channel Development (CD); and Other. The CD segment is not a geographic region, but an entirely different channel (referred to as CPG channel henceforth). The CPG business reflects everything outside the Starbucks’s stores like packaged coffee, foodservice operations, K-Cups, Starbucks VIA Ready Brew and Tazo tea. The Other category includes Seattle's Best Coffee, Evolution Fresh and Digital Ventures.
Americas: Net revenue in the segment rose 9% over the prior-year quarter to $2.5 billion, attributable to 7% growth in same-store sales and new store openings. Same store sales accelerated in August and September helped by some promotional offers after the company witnessed weak comps in June/July. Adjusted operating margin improved 210 bps to 21.4% in the quarter driven by strong sales and operating efficiency.
EMEA: Net revenue declined 2% year over year to $283.7 million in the quarter, hurt by flat traffic growth and currency headwinds.
Adjusted operating margin declined 320 bps to negative 2.3% in the quarter due to some closings and ownership changes in European stores. Excluding these store optimization initiatives, margins would have been positive.
CAP: Net revenue jumped 28% to $198.0 million in the quarter driven by a 10% increase in same-store sales and new store openings. China, Thailand, Singapore and Australia, all posted healthy increases. The company has increasingly focused on expanding its business in the fast growing Chinese market, which the company believes will become its second-largest market by 2014.
Operating margin at the CAP segment declined 340 bps year over year to 32.9% in the quarter despite the solid sales growth due to higher spending to support the fast pace of growth in China.
In the quarter, Starbucks entered the lucrative Indian market with its first three store openings in Mumbai in October. The company-operated stores were opened in joint venture partnership with Tata Global Beverages Limited. A store is expected to be opened in Vietnam in fiscal 2013.
CPG: Starbucks’s CPG business is largely diversified (in terms of revenue mix) and is a high-margin, high return on capital business that has given a fillip to both the top- and bottom-line growth in the past few quarters. Net revenue surged 32% year over year to $318.5 million in the fourth quarter, fuelled mainly by higher sales of Starbucks branded K-Cup portion packs, which are fast gaining traction.
Adjusted operating margin however declined 160 bps to 31.6% in the quarter due to higher commodity costs, mostly of coffee and an unfavorable product mix. We note that margins were however better than the last quarter.
In the quarter, Starbucks launched its much-awaited premium single cup domestic coffee machine, Verismo. Verismo is now available in many company-operated retail stores and specialty retailers like Williams-Sonoma, Inc. (WSM) across Canada and U.S. Verismo is also available online at Verismo.com. The Verismo single cup coffee machine is a major step by the company to grab higher share of the premium single-cup segment, which is the fastest growing market in the coffee industry. Starbucks, through the VIA Ready Brew and Starbucks K-Cups, already commands 22% share of the premium single cup market, which is a huge improvement from zero presence in this segment just 2-3 years back.
Overall, sales in all the segments were up sequentially.
Annual Results
In fiscal 2012, the company witnessed a 14% increase in revenue to $13.3 billion, in line with the Zacks Consensus Estimate. Adjusted earnings (excluding one time items) were $1.79 per share, which was a penny above the Zacks Consensus Estimate of $1.78. Earnings also increased 18% from the prior year.
Fiscal 2013 Outlook
For fiscal 2013, the company continues to expect revenues to grow in the range of 10%–13% driven by mid-single-digit comparable store sales growth, net new store openings and strong growth in the Channel Development business. Starbucks expects its recent new products like Verismo, light Blonde Roast coffee, K-Cups, La Boulange bakery products, Evolution Fresh juices and Refreshers energy drinks, to continue to boost sales.
Starbucks increased its store opening target from 1200 to 1300 stores driven by further acceleration in China and Asia/Pacific.
Operating margin is expected to expand approximately 100 bps year over year, up from prior expectations of 50–100 bps, driven by better operating leverage. Earnings are now expected in the range of $2.06 to $2.15, representing growth of 15%–20%. Previously, the company was expecting earnings of $2.04 to $2.14. Management expects better earnings on the back of healthy comps, better margins, tailwind for commodity costs and recent growth initiatives like Verismo.
Dividend Increase
The company raised its quarterly cash dividend to 21 cents, up 24% from 17 cents previously. The increased dividend will be payable at end of November. In the quarter, the company purchased $12 million shares and has $12 million remaining under its current authorization.
Our Recommendation
We currently have a Neutral recommendation on Starbucks. The stock carries a Zacks #3 Rank (‘Hold’ rating) in the near term.
Overall, we are encouraged by Starbucks’ strong market standing, new product launches, rapid growth in China and the flourishing CPG business as well as solid turnaround in its U.S. business. However, poor sales in Europe due to depressed macroeconomic conditions keep us on the sidelines.
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