Shares of Starbucks Corporation (SBUX) hit an all-time high of $93.99 on Feb 24.
The U.S. coffee chain enjoys solid fundamentals: strong global retail footprint, successful food/beverage innovations, best-in-class loyalty program and digital offerings, rapid growth in international markets and ongoing impressive consumer packaged goods (CPG) growth.
Its share price has gone up around 15% year-to-date and 8% in 2014. The Zacks Rank #2 (Buy) company started fiscal 2015 on a strong note with better-than-expected sales and profits in the first quarter.
Moreover, strong food sales, new handcrafted beverages, lunch/evening program, Teavana tea, K-Cup innovations and aggressive digital efforts provide a solid platform for further momentum in 2015.
Strong Quarterly Results
Starbucks reported solid first-quarter fiscal 2015 results on Jan 22. Adjusted earnings of 80 cents per share grew 23% year over year, driven by solid top-line improvement and margin expansion. Strong traffic trends in the American stores and improved comps in the China Asia-Pacific segment resulted in 13% sales increase. A strong holiday performance improved traffic trends in the American stores.
Last year, during the holiday season, Starbucks witnessed slower-than-expected traffic at the American stores due to continued shift away from “brick and mortar” retail to online sales. So Starbucks is focusing more on leveraging its mobile and digital assets as well as loyalty and e-Commerce platforms to create more revenue streams.
The success of the Starbucks card program during the holiday quarter clearly shows that the company’s efforts are paying off. Dollars loaded on Starbucks cards surged 17% year over year to a record $1.6 billion.
Guidance Up
Encouraged by a strong start, Starbucks raised the lower end of fiscal 2015 adjusted earnings per share guidance by a penny. Adjusted earnings per share are now expected in the range of $3.09 to $3.13 versus $3.08 to $3.13. Revenues are still expected to grow 16–18%.
What’s in Store for 2015?
As part of its digital efforts, Starbucks launched the “Mobile Order & Pay” initiative in 150 stores in Portland, OR, in Dec 2014 and plans to launch it nationwide by 2015-end. This allows customers to order even before arriving at a Starbucks cafe. These new mobile initiatives are expected to quicken service, increase convenience and enhance customer loyalty thereby driving mobile payment transactions and spurring traffic.
Starbucks also expects to introduce food and beverage delivery through either a third party or its own employees in select urban markets in the second half of 2015. Earlier this month, Starbucks launched a new subscription service under which freshly roasted premium coffees will be delivered to customer’s home straight from the newly opened Seattle roastery.
Better top-line performance backed by a range of sales drivers (Mobile Order & Pay, food & beverage innovation, and international growth) and various cost saving initiatives should boost earnings growth in the second half of 2015.
Key Picks in the Sector
Other restaurateurs worth considering include Kona Grill, Inc. (KONA), Jack in the Box, Inc. (JACK) and Papa Murphy's Holdings, Inc. (FRSH). While Kona Grill and Papa Murphy’s sport a Zacks Rank #1 (Strong Buy), Jack in the Box carries a Zacks Rank #2 (Buy).
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