Shares of Starbucks Corporation (SBUX) rose almost 5% in after-market trading following solid first-quarter fiscal 2015 results — its most successful holiday performance in more than 40 years.
Moreover, the world’s biggest coffee chain named board member, Kevin Johnson, as president and chief operating officer (COO) and raised the lower end of the fiscal 2015 earnings forecast.
Earnings In Line
Adjusted earnings of 80 cents per share were in line with the Zacks Consensus Estimate as well as within management’s expected range of 79 to 81 cents.
Earnings grew 16% year over year driven by solid top-line growth and margin expansion.
Adjusted earnings exclude transaction costs incurred in the quarter related to the acquisition of its Japanese joint venture (JV).
In September, the coffee giant announced plans to take full ownership of its Japanese JV — Starbucks Coffee Japan, Ltd. — in a deal valued at around $914 million. The company has already acquired 94% equity stake in Starbucks Japan. The transaction is expected to be completed before the end of first half of calendar 2015.
Revenues and Comps Improve
Total first-quarter sales of $4.80 billion increased 13% year over year and marginally beat the Zacks Consensus Estimate of $4.79 billion.
Same-store sales (comps) grew 5%, same as the previous quarter. The comps rise included 2% increase in global traffic and 3% average ticket growth.
Incremental revenues from Starbucks Japan, strong traffic trends in the American stores and improved comps in the China Asia-Pacific (CAP) segment primarily drove sales.
Margins Remain Strong
Adjusted operating margin increased 80 basis points (bps) to 19.5% driven by strong sales leverage. Margins expanded in all the operating segments, except the CAP region.
However, operating margins declined 50 bps sequentially due to the dilution resulting from ownership change in Starbucks Japan.
Segment Details
Americas: Net revenue in this flagship segment rose 10% from the prior-year quarter to $3.37 billion, attributable to 5% growth in comps driven by a strong holiday season.
A strong holiday food and beverage line-up, solid performance of holiday gifting merchandise and expanded collection of Starbucks gift cards aided traffic trends at the American stores.
Food contributed 2% to comp growth driven by strong performance of breakfast sandwiches, lunch offerings and successful performance of holiday items like festive cookies and cakes, and turkey and stuffed panini sandwich.
Holiday beverages recorded 9% year-over-year growth including the big hit Chestnut Praline Latte. Total tea sales in the U.S. stores increased 17% year over year gaining momentum from Teavana’s handcrafted iced teas.
Last year, during the holiday season, Starbucks witnessed slower-than-expected traffic at the American stores as a result of continued shift away from “brick and mortar” retail to online sales. As such, CEO Schultz intends to focus more on leveraging the mobile and digital assets as well as loyalty and e-Commerce platforms to create more revenue streams.
The success of the Starbucks card program in 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. Moreover, one out of every seven American received a Starbucks gift card this season, up from one in eight in 2013.
The increase in Starbucks card sales obviously drove increased activity at its stores with the redemption of the received gift cards.
Europe, Middle East and Africa (EMEA):Net revenue declined 2% year over year to $333.3 million due to currency headwinds and slower comps. Comps grew 4%, slowing down from 5% increase seen in the last quarter. Starbucks continues to outperform in the U.K.
China-Asia-Pacific (CAP):Net revenue grew 86% to $495.8 million driven mainly by incremental $172 million revenues from the acquisition of Starbucks Japan. Better comps and store openings also pushed up sales. Comps grew 8%, improving significantly from 5% rise in the last quarter, driven by increased traffic.
Channel Development/CPG: This segment includes whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages, Starbucks VIA Ready Brew, and Starbucks and Tazo branded K-Cup packs sold through channels such as grocery, specialty retailers and foodservice among others.
Net revenue grew 10% year over year to $442.6 million driven primarily by increased sales of packaged coffee and Starbucks-branded K-Cup offerings. Higher K-Cup sales were driven by core product sales as well as strong customer response to new K-Cup products, led by flavored coffees and seasonal limited-time offerings like Fall Blend.
All-Other: The All-Other segment includes emerging brands including Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution Fresh and Digital Ventures.Revenues in the segment grew 3% to $164.6 million.
Fiscal 2015 Outlook
Starbucks expects revenues to grow 16–18% in fiscal 2015, including approximately 6–7% of revenue growth from the Starbucks Japan acquisition. The company expects revenues to be near the lower end of the range in the first half and closer to the upper end in the second half.
Comps are still expected to grow in the mid single-digit range. The company expects to open 1,650 stores in the year — 650 in the Americas, 150 in EMEA and 850 in CAP.
The lower end of the fiscal 2015 adjusted earnings per share guidance (excluding adjustments related to Starbucks Japan) was raised by a penny, encouraged by strong first quarter performance. Adjusted earnings per share are now expected in the range of $3.09 to $3.13 versus $3.08 to $3.13.
On a positive note, management talked about improved visibility on the impact of commodity costs. Starbucks stated that coffee costs have gone down over the past six weeks and it does not see any indication of a slowdown in coffee supply.
As such, management expects commodity costs to have a roughly neutral year-over-year impact on fiscal 2015 earnings as around 94% of its coffee needs for the year are locked at favorable prices.
Adjusted operating margin is expected to remain flat or increase slightly year over year in fiscal 2015.
Second-Quarter Outlook Soft
Adjusted earnings per share are expected in the range of 64 to 65 cents in the second quarter of fiscal 2015. The second-quarter earnings expectations fell short of the Zacks Consensus Estimate of 68 cents.
We believe that the second-quarter earnings target fell short of expectation due to increased employee investments and seasonal impacts in the quarter.
New Chief Operating Officer
Starbucks named board member and former technology executive, Kevin Johnson as president and COO. The news comes after Starbucks announced earlier this month, that COO, Troy Alstead is going on an indefinite unpaid leave from March.
Stocks to Consider
Starbucks carries a Zacks Rank #3 (Hold). Better-ranked restaurateurs worth considering include Kona Grill Inc. (KONA),Red Robin Gourmet Burgers Inc. (RRGB), and Papa Murphy's Holdings, Inc. (FRSH). All these stocks sport a Zacks Rank #1 (Strong Buy).
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