) reported earnings of 46 cents per share for fiscal fourth
quarter 2012, which beat both the Zacks Consensus Estimate of 45
cents as well as company expectations. Starbucks was expecting to
post earnings within a range 44 cents to 45 cents in the quarter.
Earnings increased 24% year over year due to solid-top line
growth and margin expansion.
Adjusted quarterly earnings included a 2 cents charge for
store portfolio optimization initiatives in Europe.
Following the solid fourth quarter results, Starbucks upped
its forecast for earnings, operating margins and global net new
stores for fiscal 2013. Starbucks also increased its quarterly
dividend rate by 24%.
Revenues and Margins
Total sales for the third quarter increased 11% year over year
to $3.4 billion, in line with management expectation of posting
growth in the range of 10%-12%. The sales growth was driven
by strong global same store sales, improving revenue trends in
U.S., strong growth in China and continued momentum in the
Channel Development segment. The quarterly revenue was almost in
line with the Zacks Consensus Estimate of $3.39 billion.
Same-store sales, which exclude the impact from new
company-operated stores opened in the past 13 months, grew 6%
benefiting from consumer traffic growth. In the quarter, the
company opened 415 net new stores all over the world, including
store in China, Starbucks's key market.
Adjusted operating margin increased 160 basis points to 15.4%,
driven by top-line growth and solid operating margins in
Starbucks operates through the following segments: Americas
(inclusive of the US, Canada, and Latin America); 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, K-Cups, Starbucks VIA Ready Brew and Tazo tea. The
Other category includes Seattle's Best Coffee, Evolution Fresh
and Digital Ventures.
Net revenue in the segment rose 9% over the prior-year quarter to
$2.5 billion, attributable to 7% growth in same-store sales and
new store openings. Same store sales accelerated in August and
September helped by some promotional offers after the company
witnessed weak comps in June/July. Adjusted operating margin
improved 210 bps to 21.4% in the quarter driven by strong sales
and operating efficiency.
: Net revenue declined 2% year over year to $283.7 million in the
quarter, hurt by flat traffic growth and currency headwinds.
Adjusted operating margin declined 320 bps to negative 2.3% in
the quarter due to some closings and ownership changes in
European stores. Excluding these store optimization initiatives,
margins would have been positive.
Net revenue jumped 28% to $198.0 million in the quarter driven by
a 10% increase in same-store sales and new store openings. China,
Thailand, Singapore and Australia, all posted healthy increases.
The company has increasingly focused on expanding its business in
the fast growing Chinese market, which the company believes will
become its second-largest market by 2014.
Operating margin at the CAP segment declined 340 bps year over
year to 32.9% in the quarter despite the solid sales growth due
to higher spending to support the fast pace of growth in
In the quarter, Starbucks entered the lucrative Indian market
with its first three store openings in Mumbai in October. The
company-operated stores were opened in joint venture partnership
with Tata Global Beverages Limited. A store is expected to be
opened in Vietnam in fiscal 2013.
Starbucks's CPG business is largely diversified (in terms of
revenue mix) and is a high-margin, high return on capital
business that has given a fillip to both the top- and bottom-line
growth in the past few quarters
Net revenue surged 32% year over year to $318.5 million in the
fourth quarter, fuelled mainly by higher sales of Starbucks
branded K-Cup portion packs, which are fast gaining traction.
Adjusted operating margin however declined 160 bps to 31.6% in
the quarter due to higher commodity costs, mostly of coffee and
an unfavorable product mix. We note that margins were however
better than the last quarter.
In the quarter, Starbucks launched its much-awaited premium
single cup domestic coffee machine, Verismo. Verismo is now
available in many company-operated retail stores and specialty
) across Canada and U.S. Verismo is also available online at
Verismo.com. The Verismo single cup coffee machine is a major
step by the company to grab higher share of the premium
single-cup segment, which is the fastest growing market in the
coffee industry. Starbucks, through the VIA Ready Brew and
Starbucks K-Cups, already commands 22% share of the premium
single cup market, which is a huge improvement from zero presence
in this segment just 2-3 years back.
Overall, sales in all the segments were up sequentially.
In fiscal 2012, the company witnessed a 14% increase in
revenue to $13.3 billion, in line with the Zacks Consensus
Estimate. Adjusted earnings (excluding one time items) were $1.79
per share, which was a penny above the Zacks Consensus Estimate
of $1.78. Earnings also increased 18% from the prior year.
Fiscal 2013 Outlook
For fiscal 2013, the company continues to expect revenues to
grow in the range of 10%-13% driven by mid-single-digit
comparable store sales growth, net new store openings and strong
growth in the Channel Development business. Starbucks
expects its recent new products like Verismo, light Blonde Roast
coffee, K-Cups, La Boulange bakery products, Evolution Fresh
juices and Refreshers energy drinks, to continue to boost
Starbucks increased its store opening target from 1200 to 1300
stores driven by further acceleration in China and
Operating margin is expected to expand approximately 100 bps
year over year, up from prior expectations of 50-100 bps, driven
by better operating leverage. Earnings are now expected in the
range of $2.06 to $2.15, representing growth of 15%-20%.
Previously, the company was expecting earnings of $2.04 to $2.14.
Management expects better earnings on the back of healthy comps,
better margins, tailwind for commodity costs and recent growth
initiatives like Verismo.
The company raised its quarterly cash dividend to 21 cents, up
24% from 17 cents previously. The increased dividend will be
payable at end of November. In the quarter, the company purchased
$12 million shares and has $12 million remaining under its
We currently have a Neutral recommendation on Starbucks. The
stock carries a Zacks #3 Rank ('Hold' rating) in the near
Overall, we are encouraged by Starbucks' strong market
standing, new product launches, rapid growth in China and the
flourishing CPG business as well as solid turnaround in its U.S.
business. However, poor sales in Europe due to depressed
macroeconomic conditions keep us on the sidelines.
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