Starbucks Corporation (SBUX), one of the leading roaster and retailer of specialty coffee, registered robust results for the third quarter of fiscal 2011. Quarterly earnings soared 33% year over year to 36 cents a share. It also outpaced the Zacks Consensus Estimate of 34 cents by 5.8%.
Management applauded the depth of the company’s organizational capabilities and the dedication of partners around the world for driving higher profit in the quarter. 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 third quarter jumped 10.5% to $2,417.3 million in the quarter compared with $2,186.7 million in the prior-year quarter, backed by 8% increase in global comparable stores sales and the favorable impact of foreign exchange rate. Same-store sales benefited from an increase of number of transactions and average ticket growth of 6% and 2%, respectively.
Adjusted operating margin for the quarter expanded 40 basis points (bps) to 13.7% 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 9% to $2,013.9 million compared with third-quarter 2010, attributable to an 8% growth in same-store sales. Same-store sales were driven by a 6% rise in traffic and a 2% jump in average tickets.
Adjusted operating margin in the U.S. segment jumped to 18.8% from 16.7% 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 20% year over year to $658.5 million in the quarter, reflecting a 5% growth in same-store sales. The surge in net revenue consisted of a 4% increase in the number of transactions and a 1% increase in average ticket.
Adjusted operating margin at the International segment surged 140 bps to 12.2% in the quarter.
Global Consumer Products Group (“CPG”) segment: Net revenue rose 25% to $218.4 million in the quarter compared with $174.3 million in the prior-year period.
Operating margin at the CPG segment slipped 130 bps to 30.2% in the quarter compared with 31.5% in the prior-year period, primarily due to higher coffee costs.
Looking Ahead
The company raised its fiscal 2011 earnings guidance to the range of $1.50 to $1.51, from the previously communicated 15% to 20% growth over fiscal 2010 non-GAAP EPS on a comparable 52-week basis.
For fiscal 2012, Starbucks estimates earnings to be in the range of 15% to 20%, consistent with its long-term outlook. The estimate takes into account the unfavorable impact of approximately $0.21,which was attributable to higher coffee costs.
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.
As a part of the company’s strategy to build China as its biggest non-U.S. market, it completed an agreement with Maxim’s Caterers Ltd, its long-term joint-venture partner,to acquire full ownership of its retail operations in Central, South and Western China. Moreover, the company has made an agreement with Ai Ni Group, a farming company in Yunnan province, to form a joint venture by the end of this year that will give it control over the production and processing of coffee.
Starbucks has also unveiled a new three-region corporate structure to accelerate its growth strategy in China and Asia Pacific, including all Asia Pacific markets and China; Americas, including the United States, Canada, Mexico and Latin America; and EMEA, including Europe, U.K., Middle East, Russia and Africa.
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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