) delivered mixed fourth-quarter fiscal 2013 results, beating the
Zacks Consensus Estimate for earnings but missing the same for
revenues. However, Starbucks' fiscal 2014 earnings outlook fell
short of expectations, slightly lowering share price.
Starbucks' adjusted earnings of 63 cents per share for the
fourth quarter of fiscal 2013 beat the Zacks Consensus Estimate
of 60 cents by 5.0%. Earnings grew 37% year over year and also
beat management's expectations (59 cents-60 cents), driven by
decent sales growth and solid margin expansion.
As previously announced by the company, earnings included a
combined 3 cents per share gain from sale of equity stakes in
joint ventures in Argentina and Chile.
Revenues and Margins
Total sales for the fourth quarter increased 13% year over
year to $3.80 billion, slightly missing the Zacks Consensus
Estimate of $3.814 billion. Revenue growth was, however, at the
higher end of management's expectation of a range of 10%-13%. New
store openings, strong comps in the U.S., traffic gains in Europe
and improvement in Channel Development business drove the top
line in the quarter.
Same-store sales, which exclude the impact of the
company-operated stores opened in the past 13 months, grew 7%,
driven by 5% increase in global traffic. Comps were in line with
management's projected 5%-7% range, also lower than the third
Adjusted operating margin increased 220 basis points (bps) to
17.6%, much higher than management's expectation of an increase
of 100 bps. Operating margin growth was driven by strong sales
leverage, lower coffee costs and store portfolio optimization in
Europe. Strong margin growth in all segments drove profits in the
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 fiscal
fourth-quarter 2012); Europe, Middle East and Africa (EMEA);
China-Asia-Pacific (CAP); and Channel Development (CD); and
All-Other. The CD segment is not a geographic region but an
entirely different channel (referred to as CPG channel
henceforth). It includes the U.S. Foodservice business and also
sells whole bean and ground coffees, premium Tazo teas, a variety
of ready-to-drink beverages, Starbucks VIA Ready Brew, and
Starbucks coffee and Tazo tea K-Cup packs. The All-Other segment
comprises the emerging brands including Teavana (acquired in Dec
2012), Seattle's Best Coffee, Evolution Fresh, Tazo Retail and
Net revenue in this flagship segment continued to be strong,
rising 11% over the prior-year quarter to $2.78 billion,
attributable to 8% growth in same-store sales. Growth in the U.S.
was driven by higher seasonal beverage sales (especially pumpkin
spice latte) 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.
Canada and Latin America also did well in the quarter.
We believe that the comps will continue to grow in the U.S. in
fiscal 2014 driven by innovative beverages, enhanced food
offerings, La Boulange's national expansion and Teavana tea
introduction into stores.
Adjusted operating margin improved 100 bps to 21.8% in the
quarter driven largely by strong sales leverage.
: Net revenue increased 3% year over year at $293.4 million in
the quarter driven by improvement in comps. Comps grew 2% in the
quarter, same as in the third quarter and much better than the
declines witnessed in the preceding few quarters. Increased
consumer traffic at the stores due to food/ beverage innovation
and growth in the number of licensed stores drove comps in the
Adjusted operating margin increased 1170 bps to 9.3% 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 robust brand
building initiatives. We believe these initiatives have started
showing fruitful results leading to the improved performance in
the second half of fiscal 2013.
Net revenue grew 29% to $255.7 million in the quarter driven by
8% increase in same-store sales and the rapid pace of store
openings. In the quarter, the company opened its 1000
stores in both China and Japan.
Operating margin at the CAP segment improved 440 bps year over
year to 37.5% in the quarter. Margins improved 130 bps
sequentially; significantly surpassing management's forecast of a
sequential decline in the quarter. Increased operating leverage
and lower operating costs drove the profits for this segment.
Net revenue grew 13% year over year to $360.9 million in the
fourth quarter driven by strong performances of Starbucks/Tazo
branded K-Cup portion packs and strong foodservice sales.
Foodservice sales increased 13% while K-Cups increased 42% in the
In fact, packaged coffee showed some market share improvements
gaining from the recent price reductions. Starbucks lowered the
list price of its packaged coffee products in May in response to
price reductions by almost all competitors.
Though fiscal 2013 was slower, 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 has tripled the
number of its products that it supplies to be run on Green
Mountain's Keurig brewers.
Adjusted operating margin increased 450 bps to 35.6% in the
quarter driven by low coffee costs and sales leverage.
: Revenues in the segment grew to $105.5 million, more than
doubling over the last year due to the inclusion of sales from
Teavana retail stores which were absent in the last quarter.
Growth in the digital ventures business and Evolution Fresh also
contributed to the rise.
In fiscal 2013, total revenue increased 12% to $14.89 billion,
missing the Zacks Consensus Estimate of $14.91 billion.
Adjusted earnings were $2.26 per share, which beat the Zacks
Consensus Estimate of $2.23 as well as management's expectations
of $2.22-$2.23. Earnings increased 26% from the prior year.
However, the earnings guidance includes a one-time gain of 6
cents per share from the sale of equity stakes in joint ventures
in Mexico, Chile and Argentina.
Adjusted operating margin expanded 150 bps to a record 16.5%
in fiscal 2013.
The board of directors of Starbucks approved a 24% increase in
the company's quarterly dividend to 26 cents per share.
Fiscal 2014 Outlook Falls Short
For fiscal 2014, the company expects revenues to grow 10% or
higher, compared to prior expectation of 10%-13% growth. Comps
are still expected to grow in the mid single-digit range. In
addition to food/beverage innovations, loyalty program and
single-serve products, we believe that La Boulange bakery items,
Evolution juices and Teavana tea could emerge as meaningful
top-line growth drivers in fiscal 2014.
Starbucks expects to open 1500 stores (previously 1400) in the
year including 600 in America, 150 in EMEA and 750 in CAP.
Operating margin is still expected to expand approximately 150
bps-200 bps year over year driven by higher revenues and lower
coffee costs. Adjusted earnings are expected to range between
$2.55 and $2.65 per share (maintained), falling short of the
Zacks Consensus Estimate of $2.67. Earnings are expected in the
range of 67 cents-69 cents in the first quarter and 54 cents-55
cents in the second quarter.
Lower coffee costs are expected to benefit earnings in the
range of 9 cents-10 cents per share in the year which will be
partially offset by the pricing actions for packaged coffee. In
addition, the company expects incremental interest expense (due
to $750 million in additional long-term debt issued in September)
and tax rate in the year compared to fiscal 2013. Tax rate is
expected to be approximately 34.5% in the year, higher than 2013
Capital expenditures are expected to be approximately $1.2
billion, flat from 2013 levels.
Starbucks carries a Zacks Rank #2 (Buy). Other restaurateurs
Red Robin Gourmet Burgers Inc.
Tim Hortons Inc.
) are currently doing well and have a bright outlook
Both the stocks carry a Zacks Rank #1 (Strong Buy).
GREEN MTN COFFE (GMCR): Free Stock Analysis
RED ROBIN GOURM (RRGB): Free Stock Analysis
STARBUCKS CORP (SBUX): Free Stock Analysis
TIM HORTONS INC (THI): Free Stock Analysis
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