Higher Pricing & Accelerated Expansion In New Beverage Segments Drive Starbucks’ Top-line Growth in FY2014

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Starbucks Corporation (NASDAQ: SBUX) ended its 2014 fiscal year on a high note, as the company reported an increase of 5% in the global comparable store sales in the fourth quarter, marking the 19th consecutive quarter with above 5% comparable store sales. [1] The Seattle based coffee giant reported its record Q4 net revenue figure of $4.2 billion, up 10% year-over-year (y-o-y). As a result, the company was able to report an 11% y-o-y annual growth in the consolidated net revenues for the whole fiscal year. Starbucks’ non-GAAP operating margins in Q4 improved 280 basis points y-o-y to 20.5% and non-GAAP EPS grew 23% to $0.74.

For the fiscal year 2014, all the major segments of the company reported a more than 5% increase in comparable store sales. As a result, the company’s non-GAAP operating income grew 25% y-o-y to $3.1 billion. The non-GAAP EPS rose 21% y-o-y to a record $2.66 per share. Starbucks’ was an outperformer in the industry despite major headwinds, such as bullish coffee trends, shifting consumer trends and stiff competition from other major brands.

We have $82 price estimate for Starbucks, which is 6.6% above the current market price.

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Price Hike And Continued Innovation In Beverages Drive Comparable Store Sales

In the third quarter, Starbucks raised prices on some of its drinks by 5 to 20 cents, whereas it raised prices of its packaged coffee sold in supermarkets and other retail stores by $1 (8%) to $9.99 per bag. The company targets a more affluent demographic of coffee drinkers that typically exhibit strong brand loyalty, making demand for its coffee more inelastic with respect to price fluctuations. After ensuring that majority of the customers were aware of the reasons for the hike and the possibility of losing customer traffic was minimal, the company did not hesitate to raise its coffee prices.

As a result, the company’s comparable store sales grew 6% in the fiscal 2014. Net revenues of the Americas segment increased 9% y-o-y, primarily driven by a 5% y-o-y increase in the comparable sales. The average spend per customer visit increased 4%, whereas customer traffic increased 1%. However, the company is unsatisfied with the slow customer traffic growth.

Starbucks, being one of the elite brands in the industry, relies on its innovative menu items and loyal customer base for its continued growth. However, the company is aware of the shifting consumer preferences to ecommerce purchasing, and believes that the company is well positioned and prepared to benefit from the anticipated trend shift. Starbucks promises to make organized effort to increase its customer base through numerous initiatives, such as introduction of Starbucks gift card, new handcrafted beverages, formation of new Starbucks reserve retail stores and innovation in digital cards and mobile platforms. Apart from turning its cups to red colour, the company plans to expand its gift card initiative, which has been reaping enormous benefits to the company. One of the major driving initiatives is the ‘Starbucks For Life’ promotional offer, where every customers who uses a gift card or its ‘My Starbucks Reward’ (MSR) account for payment can win around 500,000 food and beverage surprises, and it also includes 13 ‘Starbucks For Life’ lucky offers. All the initiatives are aimed at increasing the customer traffic for better top-line growth.

New Store Expansions Remains Top Priority

Starbucks opened nearly 500 net new stores in the fourth quarter, bringing the total new store count for the fiscal 2014 to 1,599 stores, which include 742 stores in the China and Asia-Pacific region (CAP). The company is accelerating its expansion growth in Asia, as the number of stores in China approaches 1,400. China, one of the strongest markets for the company, has been reporting excellent results off lately due to rapidly growing customer base and accelerated expansion. The company added a record 120 new stores in China in the fourth quarter.

Moreover, on September 23, the Seattle-based coffee giant announced to acquire the remaining 60.5% of Starbucks Japan through a two-step tender offer process for about $914 million. [2] The main idea behind the company’s expansion into this lucrative coffee market is to expand product sales through food service channels, to accelerate the retail sales and to provide a boost to the smaller share of RTD products.

Starbucks has introduced the concept of a new super premium sub-brand ‘Starbucks Reserve’ that would be dealing with a premium quality of the product. The company plans to add the hundred of these reserve stores around the world, starting with San Francisco. Moreover, the company acquired 337 more Teavana stores in this fiscal year, including 60 Teavana Tea bars. The incremental revenues from new store openings, especially in the CAP region, have contributed significantly to the net revenues.

New Beverage Segments And Channel Development To Provide Incremental Boost

Apart from its renowned coffee stores, the company also owns and operates other brands such as Tazo, Seattle’s Best Coffee, Teavana, Evolution Fresh and La Boulange. The company introduced three new carbonated drinks under its Fizzio brand- Spiced Root Beer, Golden Ginger Ale and Lemon Ale. With the Teavana segment, the company is trying to enter the hot and iced tea segment, which is a $90 billion market. The Teavana products are already driving the revenues growth for this segment, as Teavana hand-shaken Iced teas proved to be the most profitable menu addition this fiscal year. Teavana hand-shaken iced teas accounted for one-fifth of the growth in iced tea platform. (See Starbucks To Enter Into New Beverage Segments With Teavana & Fizzio Brands)

On the other hand, the channel development segment of the company reported a 12% y-o-y increase in the net revenues to $400 million, primarily driven by 26% increase in sales of K-Cups. The company shipped 750 million K-Cups during the fiscal 2014 and expects to reach 1 billion in 2015.

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Notes:
  1. Starbucks Q4 and FY 2014 earnings call transcript []
  2. Starbucks poised for continued growth and innovation in Japan through full ownership of company’s second-largest market []