Starbucks Beats, Ups View - Analyst Blog


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Starbucks Corporation ( SBUX ) reported earnings of 40 cents per share for fiscal second quarter 2012, beating the Zacks Consensus Estimate by a penny. Quarterly earnings increased 18% year over year driven by a solid top line, improved efficiencies and cost control. The company also raised its fiscal 2012 outlook due to improving business trends and strong first half results.

Revenues and Margins

Total sales for the second quarter increased 15.0% year over year to $3.2 billion, driven by strong global same store sales and substantial top-line growth in the Channel Development segment. Revenues were strongest in China and Asia-Pacific and weakest in Europe. The quarterly revenues just breezed past the Zacks Consensus Estimate of $3.18 billion. Same-store sales, which exclude impact from new stores opened in the past 13 months, grew 7% benefiting from strong consumer traffic. In the quarter, the company opened 176 net new stores all over the world.

Adjusted operating margin for the quarter was flat at 13.5% compared with the prior-year quarter, as top-line growth was offset by increased commodity costs, especially for coffee.

Segment Details

Americas (inclusive of the US, Canada, and Latin America) : Net revenue in the segment rose 10% over the prior-year quarter to $2.4 billion, attributable to 8% growth in same-store sales and 27% increase in revenues from licensed stores. Adjusted operating margin improved 10 bps to 19.5% in the quarter as higher revenues were partly offset by rising commodity costs, mostly for coffee. In January this year, the company launched Blonde Roast coffee in the US and Canada which is off to a decent start.

Europe, Middle East, and Africa (EMEA) : Net revenue rose 14% year over year to $272.4 million in the quarter, mainly due to consolidation of the Switzerland and Austrian markets. The segment recorded an operating loss $5.5 million versus an operating profit of $7.7 million in the prior-year quarter due to softer sales and higher implementation costs (incurred for transition to a much more efficient distribution model in the UK) and strategic initiatives undertaken by the company.

China-Asia-Pacific ("CAP") : Net revenue jumped 32% to $174.6 million in the quarter driven by double-digit growth in China, an 18% in increase in same-store sales and new store openings. The company has increasingly focused on expanding its business in the fast growing Chinese market which it believes will become its second-largest market by 2014.  Operating margin at the CAP segment catapulted 660 bps to 39.8% in the quarter, reflecting solid revenues and higher joint venture incomes which more than made up for the higher commodity costs.

Channel Development, previously refereed to as Global Consumer Products Group (CPG) : Net revenue surged 57% year over year to $321.5 million in the quarter, fuelled by higher sales of Starbucks- and Tazo-branded K-Cup portion packs and the transition of the packaged coffee business in-house. Adjusted operating margin however plummeted 740 bps to 25.4% in the quarter, once again due to higher commodity costs, mostly of coffee.


The fiscal 2012 earnings outlook was raised to a range of $1.81-$1.84 from the prior band of $1.78-1.82, representing annualized growth of 19% to 21%. Earnings are expected to be stronger in the latter half of the year as management expects commodity cost pressures to ease in the period. The company estimates earnings in the range of 45-46 cents for the third quarter and 46-48 cents for the fourth quarter.

The top line is expected to grow in the low teens in fiscal 2012 driven by mid-single-digit comparable store sales growth, net new store openings and strong growth in the Channel Development business. The company plans to open 1000 new stores in fiscal 2012 with 500 in the Americas, 400 in CAP (prior target 300) and 100 in EMEA. Of the 400 stores targeted for the CAP region, more than half will be opened in China. The global comparable store sales are expected to grow at a mid-single-digit rate in fiscal 2012.

Operating margin is expected to expand 50-100 bps in fiscal 2012 versus the prior year due to expectations of easing commodity cost pressures in the second half. The Americas segment is expected to deliver a slight improvement over 2011 levels. Operating margin in the EMEA segment is expected to decline in fiscal 2012 due to increased strategic investments and depressed macroeconomic conditions in the region. In the CAP segment, margins are expected to be approximately 30%-35%. Higher coffee costs are expected to pull down solid revenue growth in the Channel Development business, resulting in margins of approximately 25%, lower than 2011 levels. The overall impact from commodity costs is expected to be approximately $230 million in fiscal 2012.

Capital expenditures are expected to be approximately $900 million in fiscal 2012 earmarked mainly for new store openings and large scale renovations of existing ones. The tax rate is expected to be approximately 33% for the year.

Other Developments

The quarter brought a spate of good news for the coffee giant. Starbucks announced the opening of its first Evolution Fresh juice store in Bellevue, Washington in March 2012. This move aims at taking a pie of the health food market.

In the same month the company expanded its existing partnership with Green Mountain Coffee Roasters ( GMCR ). Per the deal, Starbucks will manufacture and sell Starbucks-branded Vue packs to be to be used on Green Mountain's newly introduced Keurig Vue single-cup machines. Starbucks already sells the K-Cup packs to GreenMountainto run on other Keurig Brewers. Keurig is an exclusive single cup machine which makes Starbucks coffee and Tazo tea. Last month, the company had announced the launch of its own single cup at-home coffee machine called Verismo by fall this year. Investors were expecting Verismo to pose strong competition to the Keurig machines. However, Starbucks ruled out any competition between the two arguing that the Verismo system is a high pressure machine while Keurig a low pressure one. Starbucks also announced that it will continue to supply K-Cup packs to Green Mountain. The machine is also expected to be launched in China in calendar 2013.

Our Recommendation

We currently have a Neutral recommendation on Starbucks. The stock looks more appealing near term with a Zacks #2 Rank (a short-term 'Buy' rating).

GREEN MTN COFFE ( GMCR ): Free Stock Analysis Report
STARBUCKS CORP ( SBUX ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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