Starbucks Earnings Preview : Strong Sales to Continue

by Trefis Team
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Starbucks Corporation (NASDAQ: SBUX) will release its Q2 earnings report on April 24. The company reported a successful first quarter for 2014 fiscal year, wherein it saw 5% global comparable sales growth, driven by strong holiday sales and store traffic. It was the first time that all regions reported an above 5% rise in comparable sales. The revenues for Q1 grossed a record $4.2 billion, rising 12% year-on-year. Moreover, having bought ahead its stock of green coffee beans at lower costs last year, the company estimates a $110 million to $120 million help to profits this year with the coffee prices rising. This has put Starbucks in an advantageous position relative to its competitors. This along with the company’s plans of venturing into new markets and expanding its network, we expect its sales momentum to pick up pace and reflect in the Q2 earnings report figures.

We have a $73.63 price estimate for Starbucks, which is about 4% above the market price.

See our full analysis for Starbucks Corportion

Comparable Sales Growth Trend To Remain Strong

Starbucks saw an 8% increase in comparable sales in China and Asia-Pacific region (CAP) in the last quarter. The segment has around 4000 outlets spread in 14 countries, including 209 new additions in the first quarter of fiscal 2014. It recorded a quarterly revenue growth of 25%. Apart for a growing customer base in the segment, the introduction of Starbucks’ cards and My Starbucks Rewards loyalty program in the region contributed significantly to sales growth. In view of its tremendous performance in the region, the company plans to open around 750 new outlets in this fiscal year. Considering Starbucks growing popularity, and its expansion plans, we expect it to continue recording high sales in this region in the second quarter of this fiscal year.

The Europe, Middle East and Africa (EMEA) region recorded an 11% growth in revenue and a 5% rise in comparable sales last quarter. The strong sales were in part driven by strong double-digit comparable sales in Middle East and Africa, and in part by year-on-year 38% rise in licensed store revenue. The increase in the revenue and count of licensed stores manifested in 50% rise in the region’s operating income. Licensed stores do not require any major investments from the company’s side, and allows it to gross a percentage of the revenues. Starbucks’s plans on increasing its store count in the EMEA region by 150 in fiscal 2014, with the emphasis on licensed stores. This may lead to increasing sales and widening margins.

Starbucks recorded a 5% rise in comparable sales in the Americas segment (U.S., Canada, South America) in the first quarter. It was primarily driven by the holiday season, and strong customer response to new additions in the food and beverages menus. Starbucks’s target customer base consists of high income people with a taste for good quality luxury coffee. The teen consumption is also on a rise. With the economy recovering from the recession, the average disposable income has increased, which shall continue to drive the company’s sales. In addition, 600 new outlets in the Americas segment, planned for the fiscal 2014, will further boost the sales in this region.

The introduction of mobile payment app has proved a game-changer for Starbucks. With 10 million customers using the app in the U.S. alone, Starbucks has recorded around an average of 5 million mobile transactions taking place in its stores every week in Q1. The company has been able to respond effectively to the emerging trend of customers moving towards online shopping. In-store mobile payment has also allowed it to enhance the store’s efficiency and shorten the waiting period in queues. Going forward, we expect the mobile payment app to gain more traction in the market and help grow the company’s customer base.

Channel Development Segment To Pick Up

The channel development segment reported $401 million in revenue, registering a year-on-year growth of 7%  in the first quarter of 2014 fiscal year. It accounted for around 10% of the company’s quarterly revenues. Increased demand for premium single serve products manifested in this impressive performance. The company’s direct distribution model has worked very well for this business and has enabled it to enhance its outreach, and position its products better in the market. Introduction of new products in this segment, such as the Evolution Fresh juices and Teavana tea, coupled with increasing popularity of single serve products, could further boost this segment’s performance.

Innovation In Menu and Aiming New Markets Will Help

Starbucks has been working on expanding its menu offerings in order to offer a wider choice of food and beverages to its customers. Having already introduced bakery items under the ‘La Boulange’ name and alcoholic preparations in the evening, the company is planning on introducing Evolution Fresh juices in its stores, and is contemplating offering cold carbonated drinks as well. Such variety in the menu is expected to appeal to the customers and make them see Starbucks as more than just a coffee chain.

With an eye on the big breakfast business, Starbucks has recently launched its very own breakfast menu. Competing with McDonald’s, Dunkin Donuts, Burger King and Chipotle to woo the morning customers, it has come out with breakfast offers such as giving a grande cup of coffee free with a breakfast sandwich. McDonald’s, which has been the dominant player in this space, has been expanding its McCafe outlet network, attempting to encourage a coffee culture. But by leveraging its coffee, Starbucks has the potential of snatching a significant market share from McDonald’s.

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