Starbucks’ Earnings Preview: Robust Expansion Plans & New Beverage Markets To Drive Growth In 2015

Starbucks Corporation (NASDAQ: SBUX) is scheduled to release its Q1 earnings report for the fiscal year 2015 on January 22. ^[1] The coffee specialist had an impressive period last year, with high comparable sales growth and strong revenue growth year-over-year (y-o-y). Starbucks reported an 11% y-o-y annual growth in their consolidated net revenues for the whole fiscal year 2014, despite an increase of more than 100% in Arabica coffee prices in the same period. ^[2] However, the coffee May futures have dropped more than 20% since the company’s last quarter report from 220 cents per pound in October 2014 to 170 cents per pound in January 2015, indicating a potential increase in margins for the company this quarter. ^[3] The company reported an increase of 5% in global comparable store sales in the fourth quarter, marking the 19^th consecutive quarter with above 5% comparable store sales. As a result, 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, the company’s non-GAAP operating income grew 25% y-o-y to $3.1 billion and non-GAAP EPS rose 21% y-o-y to a record $2.66 per share.

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

See our full analysis for Starbucks Corportion

Vigorous Expansion Plans To Drive Top-Line Growth

Starbucks hosted its 2014 Biennial Investor Day in the first week of December, where the company’s CEO Howard Schultz mentioned that the company is prepared to enter and unlock new markets and channels through different store formats around the world. Drive-thru and roadside stores provide good growth opportunities for the company. With an increase in the frequency of customer visits over the last couple of years and its strong financial position, the company was confident enough to announce an ambitious five-year plan to expand its business. Starbucks currently operates 21,366 stores (10,713 company operated stores and 10,653 licensed stores) as of September 30, 2014; and it plans to increase the count to 30,000 over the next five years. ^[4] In the calendar year 2013, the company generated more than $15 billion in net revenues, and forecasts to double this to $30 billion by the end of 2019.

Starbucks’ China and Asia-Pacific region is one of the new target areas for the company, where it intends to focus its near-term  growth. Starbucks also announced plans to double its China store count to 3,000 by 2019. ^[5] In the fiscal 2014 year, the company opened 1,599 stores, which include 742 stores in the China and Asia-Pacific region (CAP).  China, one of the strongest markets for the company, has been reporting excellent results lately due to a rapidly growing customer base and accelerated expansion. The company added a record 120 new stores in China in the fourth quarter of fiscal 2014.

Moreover, on September 23, the Seattle-based coffee giant announced its plan to acquire the remaining 60.5% of Starbucks Japan through a two-step tender offer process for about $914 million. ^[6] Through this deal, the company plans to expand into this lucrative coffee market and thereby expand product sales through food service channels, to accelerate the retail sales and to provide a boost to the smaller share of RTD products. The deal will be completed in the second quarter of fiscal 2015, making Japan the company’s first international market outside North America. Starbucks has over 1,000 licensed stores in Japan and plans to accelerate the growth in this region. Starbucks plans to grow the revenue and operating profit in this region by three-fold, due to the increasing disposable income of the middle class group.

Starbucks has introduced a concept of new super premium sub-brand ‘Starbucks Reserve’ that would be dealing with a premium quality of the product. The company plans to add a hundred of these reserve stores around the world, starting with San Francisco. On December 17, the company opened a new Chengdu Taikoo Li store in China, as a part of its plan for innovation and expansion in China. The Starbucks’ flagship store is designed to introduce and encourage Starbucks’ Reserve Coffee — a rare and exquisite Arabica coffee. ^[7] Another Starbucks’ Reserve Roastery and Tasting room is located at Pike Street in Seattle. This new store format will allow the company to expand availability of its super-premium coffee to 1,500 global locations. Moreover, the company acquired 337 more Teavana stores in the 2014 fiscal year, including 60 Teavana Tea bars. The incremental revenues from new store openings, especially in the China and Asia-Pacific region, have contributed significantly to net revenues and might continue to play a major role in the company’s top-line growth over the next few years.

Entry To New Beverage Segments

Starbucks is already one of the dominant forces in the coffee industry, with 13% of the single-serve coffee market, behind only Keurig Green Mountain (NASDAQ:GMCR). 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.

Moreover, Starbucks introduced three new carbonated drinks under its Fizzio brand — Spiced Root Beer, Golden Ginger Ale, and Lemon Ale. Unlike existing at-home carbonation products where the machine carbonates the water and flavors are added afterwards, Fizzio carbonated drinks are finished beverages, with every ingredient receiving the same amount of carbonation. With its tea segment and recently introduced cold carbonated beverage segment, the company is entering into lucrative markets with completely different target customers. Both the new brands provide excellent platforms for the company to expand into bigger markets, apart from its coffee business. (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 net revenues to $400 million, primarily driven by a 26% increase in sales of K-Cups during the fiscal 2014 year. The company shipped 750 million K-Cups during fiscal 2014 and expects to reach 1 billion in 2015.

Innovative Beverage Menu & Mobile Commerce To Drive Comparable Store Sales

Starbucks, being one of the elite brands in the industry, relies on its innovative menu items and loyal customer base for its continued growth. The company has more than 8 million loyalty members. 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 an organized effort to increase its customer base through numerous initiatives, such as the introduction of a Starbucks gift card, new handcrafted beverages, the formation of new Starbucks reserve retail stores, and innovation in digital cards and mobile platforms. The company plans to expand its gift card initiative, which has been reaping enormous benefits to the company. In Q1 2014, the company managed to sell $1.4 million worth of gift cards, and looking at the impressive performance and increasing customer traffic in Starbucks’ stores, we can expect further big numbers, translating to higher profitability.

In short, the company might deliver strong financial numbers yet again, and might lay the path for another impressive fiscal year.

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