On Oct 14, we upgraded coffee giant Starbucks Corporation ( SBUX ) to a Zacks Rank #1 (Strong Buy) as the stock has been gaining strong momentum this year. The company is expected to maintain its robust performance when it reports the fourth-quarter and fiscal 2014 results on Oct 30.
Starbucks is one of the most recognized coffee brands in the world commanding a leading position in all coffee segments.
The company has been doing well lately on the back of its strong global retail footprint, successful food/beverage innovations, best-in-class loyalty program and digital offerings, rapid growth in international markets and ongoing impressive performance of the CPG business.
Despite difficult consumer spending environment, Starbucks' 18 consecutive quarters of 5%-or-greater global comps growth is commendable. Its margins have also been consistently growing driven by strong sales leverage. We expect the trend to continue in the fourth quarter as well.
Management expects fourth-quarter earnings in the range of to 73-75 cents representing a year-over-year growth of 22% to 25%. As regards fiscal 2014 results, adjusted earnings are expected in the range of $2.65-$2.67, representing 21-22% growth over the fiscal 2013 levels. Revenues are expected to grow 10% or higher. Comps are expected to grow in the mid single-digit range. Operating margin is now expected to expand approximately 200 basis points year over year.
We believe the recently launched breakfast/lunch sandwiches; Fizzio and core beverage innovation should drive continued strong comps performance in the fourth quarter and fiscal 2015. Moreover, La Boulange bakery items, Evolution Fresh juices, Teavana tea and K-Cup innovations offer compelling long-term growth drivers.
Though rising coffee costs and investments in technology are expected to keep fiscal 2015 profits under pressure, we believe Starbucks can nevertheless generate impressive returns next year.
Also, last month, Starbuck sannounced plans to take full ownership of its Japanese joint venture (JV) - Starbucks Coffee Japan, Ltd. - in a deal valued at around $914 million. The stock price jumped in response to the move.
The acquisition of the Japanese JV will give Starbucks full control over its stores in the country thereby enabling it to accelerate growth and innovation in its second-largest market. Starbucks' Japan business has done consistently well despite the ongoing broader economic challenges in the country. Profits in the Japanese stores are reportedly among the highest among Starbucks' markets.
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