Starbucks‘s (NYSE:SBUX) Q4 earnings came in ahead of expectation on better store traffic and an improvement in cost controls which boosted profitability. We were also encouraged by the company’s international expansion plans which could put store openings ahead or our estimates.
Starbucks competes with McDonald’s (NYSE:MCD), Peet’s Coffee (NASDAQ:PEET) and Caribou Coffee (NGM:CBOU) in the coffee retail market. Our current price estimate of $26.41 for Starbucks is below the current market price though given the results and outlook, we are increasingly comfortable exploring upside scenarios to the stock price.
Profitability Improves
FY2010 customer traffic tracked ahead of our expectations and grew by 4% vs. our expectations of 2.5% and average spend amount per visit by customers increased by 3% beating our earlier expectations of 2%. We expect both average spend and number of visitors to increase for Starbucks, which will improve profit margins.
Among new initiatives, the company highlighted that all of its company owned stores have new inventory systems to better track the inventory needs of each particular store and communicate this to Starbucks business partners. Also new systems have been rolled out to reduce training time for baristas and improve accuracy of orders.
These enhancements contributed to its operating profit margin coming in at 17.4% in the last quarter vs. 12% a year ago. This could create upside to our current estimates. For company owned stores we currently expect EBITDA margins to level off at 13%; however if these can reach 15%, this adds around 8% to our estimates.
International Expansion
Starbucks has more than 16,000 cafes around the world and it’s growing each year. Recent announcement of opening 500 stores in 2011, by CEO Howard Schultz, is in line with our earlier estimates. Management also noted that 400 of 500 stores will be international and mostly licensed, or franchise, run stores.
In India, Starbucks might form an alliance with Jubilant Group, which already runs Domino’s pizza in India, and it plans to open more stores and farm coffee beans in China where it already has a wide footprint. We believe these markets could drive store growth beyond our figures.
We current expect Starbucks to run 12,000 franchise stores by the end of our forecast period, though if this grows to 14,000, it would add another 6% to our estimates.
