) delivered solid third-quarter fiscal 2013 results, beating the
Zacks Consensus Estimates for both revenues and earnings. Both
the metrics also grew year over year. Robust increase in global
traffic, increasing popularity of its Starbucks loyalty cards,
efficiency improvements and cost controls and lower coffee costs
Starbucks' adjusted earnings of 55 cents per share for the
third quarter of fiscal 2013 beat the Zacks Consensus Estimate of
53 cents by 3.8%. Earnings grew 28% year over year and also beat
management's expectations, driven by solid sales performance and
significant margin growth.
The company raised earnings expectations for the fourth
quarter and fiscal year 2013 and also issued an impressive
guidance for fiscal 2014.
Revenues and Margins
Total sales for the third quarter increased 13% year over year
to $3.74 billion and also surpassed the Zacks Consensus Estimate
of $3.72 billion. Strong comps in the U.S. and Asia-Pacific and
significant improvement in Europe drove the top line in the
Same-store sales, which exclude the impact of the
company-operated stores opened in the past 13 months, grew 8%,
higher than both the first and second quarter driven by 7%
increase in global traffic. Innovative beverages and an expanded
food program drove traffic growth.
Adjusted operating margin increased 150 basis points (bps) to
16.4% driven by strong sales leverage and lower coffee costs.
Cost controls and improved efficiency in the retail stores also
Starbucks operates through the following segments: Americas
(inclusive of the U.S., Canada and Latin America and also
includes the La Boulange bakery business acquired in the fourth
quarter of fiscal 2012); 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, Starbucks coffee
and Tazo tea K-Cup packs, Starbucks VIA Ready Brew and Tazo teas.
The All-Other category includes Teavana, Seattle's Best Coffee,
Evolution Fresh, Tazo Retail stores and Digital Ventures
Net revenue in this flagship segment rose 12% over the prior-year
quarter to $2.78 billion, attributable to 9% growth in same-store
sales. In Americas, U.S. comps grew a solid 9% despite the
cautious consumer spending environment. Growth in the U.S. was
driven by continued beverage innovation and enhanced food
offerings (especially La Boulange bakery items).
Starbucks loyalty cards have become increasingly popular and
are a major driver of consumer traffic in the U.S. In the third
quarter, total dollars loaded on Starbucks cards grew 30% year
over year in the U.S. We believe that the comps will continue to
improve in the U.S. Canada and Latin America also did well in the
Adjusted operating margin improved 210 bps to 22.3% in the
quarter driven by strong sales leverage, improved productivity
and lower coffee costs.
: Net revenue increased 2% year over year at $287.2 million in
the quarter driven by improvement in comps. Comps grew 2% in the
quarter, much better than the declines witnessed in the past few
quarters. Increased consumer traffic at the stores due to food/
beverage innovation and growth in the loyalty program drove comps
in the quarter. The company witnessed positive comp growth in the
Adjusted operating margin increased 260 bps to 3.2% in the
quarter due to portfolio-mix shift toward licensed stores and
solid cost control.
The company is trying to revive its business in Europe by
pursuing increased higher-margin licensing opportunities,
shutting down unprofitable stores, cutting general and
administrative (G&A) expenses and implementing more robust
brand initiatives. We believe these initiatives have started
showing fruitful results leading to the improved performance in
the third quarter.
Net revenue jumped 29% to $233.7 million in the quarter driven by
9% increase in same-store sales and the rapid pace of new store
openings. Consumer traffic grew 8% in the third quarter, double
than that of the second quarter, driven by local innovations as
well as growth in core offerings. Japan did significantly well
with comps rising in double digits.
Operating margin at the CAP segment improved 250 bps year over
year to 36.2% in the quarter, turning around from the declines
seen in the past two quarters. Increased operating leverage,
higher joint venture income and lower coffee costs drove the
profits for this segment. However, CAP margins are expected to
decline sequentially in the fourth quarter.
Net revenue grew 6% year over year to $336.4 million in the third
quarter as strong performances of Starbucks/Tazo branded K-Cup
portion packs, VIA Ready Brew and Verismo-at-home coffee machine
were offset by softness in packaged coffee. K-Cup portion packs
sales increased 51% in the quarter.
Revenue growth in this segment has slowed down in this fiscal
year due to increased competitive environment for packaged
coffee. Starbucks lowered the list price of its packaged coffee
products in May in response to price reductions by almost all
CPG revenues are expected to accelerate in fiscal 2014 driven
by volume growth from recent price reduction, innovation,
international expansion and an accelerated agreement with partner
Green Mountain Coffee Roasters, Inc.
). Under the new five-year agreement, Starbucks will triple the
number of its products that it supplies to be run on Green
Mountain's Keurig brewers.
Adjusted operating margin increased 280 bps to 28.6% in the
quarter driven by low coffee costs.
: Revenues in the segment grew to $108 million, more than
doubling over the last year.
Fourth Quarter & Fiscal 2013 Earnings Guidance
Fiscal 2013 earnings expectations were increased from a range
of $22.12 - $2.18 to $2.22 - $2.23.
The fourth-quarter earnings guidance was also increased from
54 cents - 57 cents to 59 cents - 60 cents. The guidance,
however, includes a one-time gain from sales of minority stake in
joint ventures in Argentina and Chile.
In the fourth quarter, revenues are expected to grow in the
range of 10%-13%. The third-quarter comp performance is not
expected to be repeated in the fourth quarter and is expected to
range between 5% and 7%. Starbucks expects operating margins to
improve 100 bps driven by better operating leverage. Lower
commodity costs are expected to benefit earnings by 2 cents in
the quarter which will be partially offset by the lower pricing
for packaged coffee.
Robust fiscal 2014 Guidance Issued
For fiscal 2014, the company expects revenues to grow in the
range of 10%-13% driven by mid single-digit comparable-store
sales growth and net store openings.
Starbucks expects to open 1400 stores in the year including
600 in America, 100 in EMEA and 700 in CAP.
Operating margin is expected to expand approximately 150 bps -
200 bps year over year. Adjusted earnings (excluding gains from
sale of minority stakes in joint ventures in Chile, Argentina and
Mexico) are expected to grow 18% - 22% from the 2012 level and
range between $2.55 and $2.65 per share. Lower coffee costs are
expected to benefit earnings in the range of 9 cents - 10 cents
in the year which will be partially offset by the pricing actions
for packaged coffee.
Starbucks carries a Zacks Rank #2 (Buy). Other restaurateurs
Burger King Worldwide, Inc.
Cracker Barrel Old Country Store, Inc.
) are currently doing well and have a bright outlook
Both the stocks carry a Zacks Rank #1 (Strong Buy).
BURGER KING WWD (BKW): Free Stock Analysis
CRACKER BARREL (CBRL): Free Stock Analysis
GREEN MTN COFFE (GMCR): Free Stock Analysis
STARBUCKS CORP (SBUX): Free Stock Analysis
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