Starbucks’ Gift Cards Initiative and Mobile Commerce Drive Customer Traffic In Q1 2015

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Starbucks Corporation (NASDAQ: SBUX) is off to a great start for the fiscal 2015 year, as the coffee giant reported impressive numbers in its Q1 earnings report released on January 22. The company’s consolidated net revenues in Q1 rose an impressive 13% year-over-year (y-o-y) to $4.8 billion, with a significant contribution by each segment. Moreover, the company’s operating income rose 12% y-o-y to $916 million and non-GAAP EPS rose 16% y-o-y to a record $0.80, primarily due to the gain on the acquisition of Starbucks Japan. [1]

Starbucks managed to deliver 9 million more transactions in its U.S. stores, and 12 million more transactions globally compared to that in Q1 2014. As a result, the company’s global comparable store sales rose 5% y-o-y, with a 2% increase in customer count, marking the 20th consecutive quarter with above 5% comparable store sales. Moreover, the company’s non-GAAP operating margins improved 80 basis points y-o-y to 19.5%, as the company increased its share of premium single serve, premium packaged coffee and packaged tea.

The channel development segment of the company reported a 10% y-o-y increase in net revenues to $442 million, primarily driven by an increase in sales of K-Cups during the first quarter. The company shipped approximately 100 million K-Cups in December 2014 alone, up 20% over December 2013.

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

See our full analysis for Starbucks Corportion

Gift Card Initiatives & Mobile Commerce Drives Customer Traffic

Apart from Starbucks’ beverage and food platform, the company’s innovative new features, such as Starbucks gift cards, have managed to attract more customers over the last few months. Starbucks gift cards proved to be a huge success in the U.S., as the increase in sales of Starbucks gift cards led to an increase in the membership of the My Starbucks Reward (MSR) program. This initiative led to the increase in the number of guest counts at the company’s U.S. stores. In Q1, Starbucks added 0.9 million MSR members, taking the total membership count to 9 million. Among these, 5.5 million members hold the gold membership privilege.

With an increase in profitability, resulting from this initiative and positive response from its customers, the company is confident of the future of the MSR program. The success of this initiative in the future, not only guarantees incremental revenues and profit for the company, but also provides the company with increased loyal customers for the longer term.

On the other hand, mobile payment features provided by the company has not only been convenient for current customers, but also has been attracting many new customers. The Starbucks mobile Order and Pay is an integrated technology that allows customers to place an order at a store of their convenience and pick up the completed order and pay through the app as well. This saves time and effort for the customers and faster service for the company’s outlets, giving a better experience to the customers. According to the data provided by the company, around 13 million customers are using the Starbucks mobile app in the U.S. alone, with 7 million transactions per week. The company plans to launch this initiative in 600 stores in the Pacific Northwest in the coming months.

Starbucks is planning on introducing a “delivery” feature in the second half of 2015, which when coupled with mobile order and pay, might increase customer traffic in the coming years.

Expansion Plans On The Cards

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. The company opened 512 net new stores in the first quarter of fiscal 2015, taking its total count to 21,878; and it plans to increase the count to 30,000 over the next five years. [2]

Starbucks has introduced a concept of new super premium sub-brand ‘Starbucks Reserve’ that would be dealing with a premium version of the product. The company plans to add one hundred of these reserve stores around the world, starting with San Francisco.

  • China & Asia-Pacific (CAP)

Starbucks reported an 8% y-o-y increase in the comparable store sales in the CAP region this quarter, primarily due to an increase in the customer count. The segment remains the prime focus for the company’s future growth, as the region has nearly 4,800 stores. China is the company’s largest market outside U.S., with stores across 86 cities in the country. The company plans on taking the country’s store count to 3,400 by the end of fiscal 2019. Shanghai has 320 Starbucks stores, making it the city with the most Starbucks stores in the world. Moreover, Starbucks China launched 8 Reserve Stores in 5 cities. 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. [3]

On September 23, Starbucks announced its plan to acquire the remaining 60.5% of Starbucks Japan through a two-step tender offer process for about $914 million. [4] 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. As a result of this acquisition, coupled with 767 net new store openings, the revenues for the segment grew 86% y-o-y to $496 million. The deal will be completed by the end of the second quarter of fiscal 2015, making Japan the company’s first international market outside North America.

Growth Opportunities: New Beverage Segment

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. With complete integration of Teavana, the company now plans to double the business to $2 billion over the period of 5 years, with a primary focus in the CAP region. 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. The company’s handcrafted tea beverages in retail stores are driving revenue growth, with overwhelming market response to Teavana branded Shaken Iced Tea and Teavana Tea Lattes.

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Notes:
  1. Starbucks Q1 2015 earnings call transcript []
  2. Starbucks details five-year plan to accelerate profitable growth at investor conference []
  3. Starbucks China opens new flagship store; announces first-of-a-kind partner development program []
  4. Starbucks poised for continued growth and innovation in Japan through full ownership of company’s second-largest market []