Starbucks Rules with Record Earnings - Analyst Blog

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Starbucks Corporation ( SBUX ) registered robust results for fiscal first quarter 2012. Quarterly earnings increased 11% year over year to a record 50 cents a share. It slivered past the Zacks Consensus Estimate by a penny.

Management applauded the overall health and strength of the company's global business coupled with the continuous product innovation for boosting the earnings growth in the quarter. The quarter brought the holiday season with it, which gave more leisure hours for Starbucks lovers to spend quality time sipping their favorite cappuccino in the Starbucks stores and thus same store sales was subsequently boosted.

Revenues and Margins

Total sales for the first quarter increased 16.4% to $3,435.9 million in the quarter compared with $2,950.8 million in the prior-year quarter, backed by 9% increase in global comparable stores sales, growth in Consumer Products Group revenues and the favorable impact of foreign currency exchange. The quarterly revenues surpassed the Zacks Consensus estimate by 4.3%. Same-store sales benefited from higher number of transactions and average ticket growth of 7% and 2%, respectively.  

Adjusted operating margin for the quarter shrank 80 basis points (bps) to 16.2% compared with the prior-year quarter, reflecting higher sales leverage, partially offset by higher commodity costs.

Segment Details

U.S. segment: Net revenue in the segment rose 11% to $2,578.6 million compared with first quarter 2011, attributable to a 9% growth in same-store sales. Same-store sales were driven by an 8% rise in number of transactions and a 2% increase in average tickets.

Adjusted operating margin in the U.S. segment contracted 80 bps to 21.8% in the prior-year period, reflecting higher commodity costs following low yield in Arabica coffee in Colombia.

EMEA segment: Net revenue surged 17% year over year to $303.0 million in the quarter, attributable to rise in company-operated store revenue that benefited from the consolidation of the Switzerland and Austria markets.

Adjusted operating margin at the EMEA segment plummeted 320 bps to 6.5% in the quarter.

China-Asia-Pacific ("CAP") segment : Net revenue jumped 38% to $166.9 million in the quarter.

Operating margin at the CPG segment slumped 350 bps to 34.6% in the quarter, reflecting higher performance-based compensation, higher operating expenses in support of the continued expansion of the region and higher commodity costs.

Global Consumer Products Group Segment Results : Net revenue surged 72% year over year to $335.8 million in the quarter, fuelled by sales of Starbucks- and Tazo-branded K-Cup® portion packs.

Adjusted operating margin plummeted 1270 bps to 23.7% in the quarter.

Looking Ahead

The company updated its fiscal 2012 earnings guidance to the range of $1.78 to $1.82, up 17% to 20% from the prior year.

Starbucks has been focusing on foreign markets for additional growth. The company's policy is unlike its rival Green Mountain Coffee Roasters ( GMCR ), which relies almost entirely on the U.S. market.

Starbucks has closed its joint venture deal with Tata Coffee Ltd., Asia's largest publicly traded coffee grower. The coffee king entered the Indian market in January 2012 through an agreement with Tata. It plans to open its first outlet in India by second half of this fiscal year. Seattle-based Starbucks plans to open 800 new outlets throughout the world out of which 400 outlets will be in U.S. The retail giant already has 16,800 stores in more than 50 countries. Notably, a major share of its revenues comes from non-U.S. locations.

The retail giant will offer coffee in K cups across food, drug, mass, special and department stores in the U.S. Management has also revealed that the K cups will be available in retail outlets like Wal-Mart Stores Inc. ( WMT ) and Target Corp. ( TGT ).

Within two months of its launch, Starbucks grabbed 11% share of Premium Single Cup Segment and shipped more than 100 million K-Cup packs.

Starbucks also started offering wine and beer after 2:00 pm in the evening in its US Stores in order to increase the evening traffic. It already serves spirit in Portland and Seattle stores, and plans to expand the menu in Chicago and California stores.

Recommendation

Starbucks operates in a highly competitive market. Moreover, labor unions pose inherent risks for the company and the company's high dependence on information technology also remains a concern. However its 'Good For You' message to its loyal customers, product innovation and high quality coffee provide it the edge over its competitors.

Currently, we prefer to be Neutral on Starbucks' stock for the long term. Starbucks holds a Zacks #2 Rank, which translates into 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 The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: GMCR , SBUX , TGT , WMT

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