Starbucks Will Flex Global Growth Muscles In Earnings

by Trefis Team
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Starbucks Corporation (NASDAQ:SBUX) is scheduled to announce its Q3 earnings on July 26, 2012. The company delivered strong results in the second quarter, which encouraged it to raise the full year EPS forecast in the range of $1.81 to $1.84. The stock has had a volatile year so far, reaching as high as $61 before retreating to the current prices of early 50s. Here are a couple of trends to watch out for in the coming quarter.

1) Impressive Comparable Sales Growth to Continue

Starbucks has aggressive expansion plans lined up. By the end of fiscal 2012, it plans to add around 500 new stores in the Americas, (primarily in Brazil, Argentina and Mexico), 400 stores in Asia/Pacific, and another 100 in EEMA (East Europe, Middle East and Africa). In the traditional coffee stores, China/Asia Pacific region is the growth driver for the company, registering comparable sales growth of 19% in the first two quarters of the fiscal 2012.

Since the company has a low penetration in these regions currently, we expect to see strong comparable sales growth in the short term. Comparable sales for the Americas region grew 8% in the first half of the fiscal, and this is likely to continue in this quarter as well helped by the national roll-out of  Blonde earlier this year.

Thus, we expect the margins for its company-operated stores to remain relatively unchanged since a rise in comparable sales should help offset the increase in input costs. Moreover, the coffee prices have been relatively subdued in 2012 which should also act in the company’s favor.

Margins for its licensed (or franchised) stores generally remain stable since the revenue is recognized as a percentage of store sales and the company is not directly impacted by short-term changes in labor, rent or food and beverage costs.


2) Expanded Distribution for Packaged Tea & Coffee

Sales for its channel development segment, which primarily consists of packaged coffee and tea such as VIA Ready Brew and K-Cup packs (which even includes Blonde), available in grocery and retail stores, surged 57% in the previous quarter. However, the growth is somewhat exaggerated by the full recognition of packaged products under the direct distribution model.

Starbucks had transitioned the retail of CPG products from in-house retailing (i.e. retail through its own stores) to a direct distribution model (i.e. through groceries, warehouse clubs and drugstores) in 2011, which resulted in significant revenue growth for the segment. Once the impact of the full recognition of revenues is discounted in the subsequent quarters, we should see the revenue growth rate falling to more feasible levels. We expect its revenues to rise by 10% annually in the long run.

Starbucks also opened its first juice bar named as Evolution Fresh, the company that it acquired in 2011. It also plans to open tea stores under the brand name Tazo. It will be interesting to see how the process of diversification shapes in the subsequent quarters.

We have a $55 price estimate for Starbucks currently, which is about 5% above the current market price.

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