We have maintained a Neutral recommendation on
Starbucks Corporation
(
SBUX
) following appraisal of fiscal third quarter 2012 results.
Starbucks 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 the company expectations. Starbucks was
expecting to post earnings within a range of 44 cents -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 some time. Quarterly earnings however increased 19% year
over year due to top-line and margin growth.
Total sales for the third quarter increased 13% year over year
to $3.3 billion. The sales growth was driven by strong global same
store sales and substantial top-line growth in the Channel
Development (also referred to as CPG business) segment. The
quarterly revenues were however almost in line with the Zacks
Consensus Estimate of $3.31 billion. Following the third quarter
miss, the company cut its outlook for the fourth quarter due to the
economic downturn.
Starbucks is one of the most recognized coffee brands in the
world. Other than fresh, rich-brewed coffees, Starbucks' offerings
also include many complementary food items and a selection of
premium teas, sold mainly through the company's retail stores.
Popular company brands include Starbucks coffee, Tazo Tea,
Seattle's Best Coffee, and Starbucks VIA Ready Brew.
Starbucks' CPG business, which comprises everything outside the
Starbucks stores like packaged coffee, foodservice operations,
K-Cups, Starbucks VIA Ready Brew and Tazo tea, is growing rapidly.
It is a largely diverse (in terms of revenue mix), high-margin,
high-return on capital business, which has given a fillip to both
top- and bottom-line growth in the past few quarters. The company
expects this business, which deepens Starbucks' presence in the
at-home coffee and away-from-home coffee segments, to continue to
grow over the long term.
Starbucks focuses on brand innovation and new products to create
differentiated value proposition for its customers. Among the
recently launched products, Starbucks VIA Ready Brew and Starbucks
K-Cups helped it to capture 22% share of the premium single-cup
market against a zero presence in this segment just 2-3 years back.
The Verismo system (available online and expected in stores in
early October) and the expanded partnership with
Green Mountain Coffee Roasters
(
GMCR
) (to use Starbucks-branded Vue packs on the latter's Keurig
Brewers) are expected to help Starbucks capture further share of
this potential $8 billion market in the coffee industry. Other
successful recent product launches include Starbucks Refreshers,
made from real fruit juice and green coffee extract, Blonde Roast
coffee and Evolution Fresh juices. Continued innovation and new
product offerings would drive both top- and bottom-line growth for
the company, going forward.
Moreover, Starbucks' U.S. operations have witnessed a
substantial turnaround since the last couple of years. The segment
regularly posts an operating margin of around 20%, which is
expected to improve further through new store openings, remodeling
of existing stores, new product launches like Blonde Roast,
Verismo, K-Cup, VIA single serve and Evolution Fresh juices over
time. Further, Starbucks' business in China is rapidly growing and
the region is expected to become the company's second-largest
market by 2014.
Despite the positives, poor sales in Europe due to depressed
macroeconomic conditions and rising cost of commodities, especially
coffee, keep us on the sidelines.
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