Markets

Starbucks' Sales Exceptional: Will Costs Hurt Profits in FY16?

A list of stock prices rising and declining in value
Credit: Shutterstock photo

We issued an updated research report on Starbucks CorporationSBUX on Nov 13, 2015.

On Oct 29, Starbucks reported strong fourth-quarter fiscal 2015 results. Though earnings of 43 cents per share missed the Zacks Consensus Estimate by 2.3%, it grew 16% year over year as solid top-line growth offset the lower margins. Similar to the past two quarters, the company delivered exceptional sales growth of 18% backed by consistent strong traffic trends, mainly in the U.S. Beverage innovation, higher food sales and continued benefits from digital initiatives led to solid comps in the key U.S. market.

In fact, sales growth at Starbucks has been exceptional for the major part of fiscal 2015 driven by solid global traffic trends and higher food/beverage sales.

We believe that digital efforts like Mobile Order and Pay, delivery services and third-party loyalty partnerships, food and beverage innovation, lunch and evening programs, Starbucks Reserve premium coffees and Teavana teas should fuel stronger comps growth in the Americas in fiscal 2016.Comps guidance of "somewhat above" the long-term mid single-digit target in fiscal 2016 reflects management's improved sales visibility.

Starbucks' technological innovations should further strengthen its brand, enhance efficiency and in-store execution while increasing profitability.

The coffee giant's latest digital initiative, Mobile Order and Pay, is showing positive early results and could prove to be a key growth driver in fiscal 2016.

The service was launched last year which is now available in all U.S. company-operated outlets - more than 7,400 locations. Mobile Order and Pay allows customers to order before arriving at a Starbucks café and pick up the items at their selected Starbucks store, thus saving time. Starbucks has started to deploy the facility in 150 stores in the U.K. and more than 300 stores in Canada and plans to continue rolling out the platform in key international markets.

Further, Starbucks is strengthening its product portfolio with significant innovation in beverages, refreshment, health and wellness, tea and core food offerings. Food has become a key growth driver and contributes around 20% to the company's U.S. revenues. The company plans to expand its lunch menu and offer locally relevant snacks around the world.

Starbucks' much-talked-about evening program - food, wine and beer offerings - available at 100 stores is expected to be rolled out in 20-25% of Starbucks outlets in the U.S. by fiscal 2019. The company is seeing increased sales of Teavana handcrafted beverages like Teavana Shaken Iced Tea at its stores in North America. Starbucks is also building the Starbucks Reserve ultra-premium coffee brand.

However, accelerated global employee and digital investments can keep fiscal 2016 profits under pressure.

Starbucks' employee investments in 2015 included higher pay rates for barista and shift supervisors, additional performance-based recognition programs, new food benefit policies and the online college education program in collaboration with Arizona State University. In fiscal 2016, management expects the employee and digital investments between $250 million and $275 million, as against nearly $145 million a year ago. In fiscal 2016, employee investments will include wage and benefit increases and even housing benefits in some countries. Moreover, the company will increase digital investments, both in the U.S. and its largest international markets. These investments are likely to erode fiscal 2016 earnings growth by 3%.

Other Stocks to Consider

Starbucks has a Zacks Rank #2 (Buy). Investors interested in the restaurant sector may consider stocks like BJ's Restaurants, Inc. BJRI , Carrols Restaurant Group, Inc. TAST and Cracker Barrel Old Country Store, Inc. CBRL . All the three stocks sport a Zacks Rank #1 (Strong Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

CRACKER BARREL (CBRL): Free Stock Analysis Report

BJ'S RESTAURANT (BJRI): Free Stock Analysis Report

STARBUCKS CORP (SBUX): Free Stock Analysis Report

CARROLS RESTRNT (TAST): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

SBUX CBRL TAST BJRI

Other Topics

Stocks

Latest Markets Videos

Zacks

Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

Learn More