) reported earnings of 43 cents per share for fiscal third quarter
2012, which missed both the Zacks Consensus Estimate of 45 cents as
well as company expectations. Starbucks was expecting to post
earnings within a range of 44 cents to 45 cents in the quarter.
The lower-than-expected results were due to soft consumer
traffic trends in the U.S. in June and a weakening global consumer
environment. The company has also been struggling in Europe for
Quarterly earnings, however, increased 19% year over year due to
top line and margin growth. Following the third quarter miss,
Starbucks reduced its outlook for the fourth quarter due to the
economic downturn at large.
Revenues and Margins
Total sales for the third quarter increased 13% year over year
to $3.3 billion driven by strong global same-store sales and
substantial top-line growth in the Channel Development segment. The
quarterly revenues were, however, almost in line with the Zacks
Consensus Estimate of $3.31 billion.
Revenues were strong in China, Asia-Pacific and the Americas.
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
231 net new stores all over the world including the 600
store in China.
Adjusted operating income expanded 22% to $491.6 million while
operating margin increased 120 basis points to 14.9%, on the back
of top-line growth, partially offset by increased commodity costs,
especially for coffee.
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
The CPG business reflects everything outside the Starbucks
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 24%
increase in revenues from licensed stores. Consumer traffic trends
nonetheless softened in June which has continued into July.
Adjusted operating margin improved 90 bps to 20.7% in the
quarter driven by higher revenues which offset the negative impact
of rising commodity costs, mostly for coffee.
: Net revenue rose 9% year over year to $282.0 million in the
quarter, mainly due to consolidation of the Switzerland and
Austrian markets. The Central and Eastern Europe and the Middle
East markets fared much better than those in Western Europe.
Adjusted operating margin declined 100 bps to 0.9% in the
quarter due to higher implementation costs incurred for transition
to a much more efficient distribution model in the UK. Starbucks
hopes to close some stores in Europe in the next few quarters.
Net revenue jumped 31% to $181.8 million in the quarter driven by a
12% increase in same-store sales, incremental revenue from licensed
stores 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.
Same store sales in China grew by double digits in the quarter.
Operating margin at the CAP segment increased 140 bps year over
year to 33.8% in the quarter, reflecting revenue growth. However,
operating margin was down sequentially.
Net revenue surged 45% year over year to $316.4 million in the
quarter, fueled by meaningful growth in packaged coffee and
increasing share of the premium coffee category due to higher sales
of Starbucks- and Tazo-branded K-Cup portion packs.
We note, however, that this segment saw a sequential decline in
revenue. Adjusted operating margin plummeted 440 bps to 27.3% in
the quarter, once again due to higher commodity costs, mostly of
The premium coffee segment now accounts for more than 50% of the
total coffee sold in US grocery, drug, and mass channels. Starbuck
owns 28.2% share of premium coffee in these channels. In the
premium segment, premium single cup makes up 20% of the market.
Continued growth of its Starbucks VIA Ready Brew and Starbucks
K-Cups has allowed Starbucks to capture 22% of the premium single
cup market. The Verismo at-home single-cup machine (to be launched
in the fall) and the expanded partnership with
Green Mountain Coffee Roasters
) (to use Starbucks-branded Vue packs on the latter's Keurig Vue
single-cup machines) are expected to help Starbucks capture further
share of this fastest growing market in the coffee industry.
Cuts Fourth Quarter Outlook
In the fourth quarter, Starbucks hopes to record earnings in the
range of 44 cents to 45 cents, down from prior expectations of 46
cents to 47 cents due to challenging economic conditions. This
fresh guidance represents an estimated growth of 19%-22%, whereas
revenues are expected to grow in the range of 10%-12%. Commodity
cost headwinds are expected to wane in the fourth quarter.
Fiscal 2013 Outlook
For fiscal 2013, the company expects revenues to grow in the
range of 10%-12% driven by mid-single-digit comparable store sales
growth, net new store openings and strong growth in the Channel
Starbucks is expecting to open 1200 new company-operated stores
in 2013, a 20% increase from fiscal 2012. Of the 1200 stores, 600
will be opened in the Americas, 500 in CAP and 100 in EMEA. Of the
500 stores targeted for the CAP region, more than half will be
opened in China. Licensed stores will make up between one-half and
two-thirds of new store openings in the Americas, EMEA and CAP
Earnings are expected in the range of $2.04 to $2.14,
representing growth of 15%-20%. Operating margin is expected to
expand 50-100 bps in fiscal 2013 versus the prior year.
Commodity costs are finally expected to be a tailwind in fiscal
2013. Offsetting increased costs of dairy, commodity costs are
expected to benefit results by approximately $100 million in fiscal
Capital expenditures are expected to be approximately $1 billion
in fiscal 2013 earmarked mainly for new store openings and
manufacturing capacity expansion. The tax rate is expected to be
approximately 33% for the year.
We currently have a Neutral recommendation on Starbucks. The
stock carries a Zacks #3 Rank (Hold rating) in the near term.
Overall, we are encouraged by Starbucks' strong market standing,
new product launches, rapid growth in China and the flourishing CD
segment as well as solid turnaround in its U.S. business. However,
poor sales in Europe due to depressed macroeconomic conditions and
rising cost of commodities, especially coffee, keep us on the
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