Starbucks Earnings Preview: Focus Shifts To Asian Markets

Coffee giant Starbucks Corporation (NASDAQ: SBUX) is slated to release its Q2 earnings report for fiscal 2015 on April 23rd. ^[1] The company was one of the outperformers in the industry last year with high comparable sales growth and strong revenue growth year-over-year (y-o-y). Starbucks had an impressive start to fiscal 2015 as well, as it reported strong numbers in its Q1 2015 report, with a 13% y-o-y increase in the net consolidated revenues to $4.8 billion. Moreover, 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. ^[2]

Despite the fluctuating coffee prices last year and strong competition from other brands, the company managed to post high margins and impressive sales figures. Starbucks has a lot to look forward to this year, as the company has introduced a new innovative concept of ‘Starbucks Reserve Roastery and Tasting Rooms’, and is planning to expand this initiative. Furthermore, the coffee giant has entered into new beverage segments and plans to increase its markets share in those segments. On March 18, Starbucks announced a 2-for-1 stock split. ^[3] Starbucks’ shareholders, who held the stock as of March 30, got one additional share for each share held earlier. The new shares were payable on April 8 and the stock started trading after the split on April 9. (See: Starbucks’ price target updated after 2-for-1 split)

After adjusting for the 2-for-1 stock split, Trefis estimates the stock price for the company at $45.12, which is roughly 7% below the current market price.

See our full analysis for Starbucks Corportion

Mobile Commerce & Gift Cards To Play Vital Role In Attracting Customers

Apart from Starbucks’ beverage and food platform, the company’s innovative new features, such as Starbucks gift cards, have boosted the company’s average weekly footfall 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 membership of the My Starbucks Reward (MSR) program. This initiative led to an increase in the number of guests at the company’s U.S. stores. In Q1, Starbucks added 0.9 million MSR members, taking the total membership count to 9 million.

On the other hand, the company’s mobile payment feature has not only been convenient for current customers but is also helping attract new customers. This feature saves time and effort as Starbucks can provide faster service at it outlets, in turn resulting in better experience for customers. According to the company’s data, 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.

Starbucks Reserve Stores – A New Wildcard

In December 2014, Starbucks introduced a new concept and opened the first ‘Starbucks Reserve Roastery and Tasting Rooms’ in Seattle. The concept is aimed at enriching the experience of coffee lovers by providing them a 15,000 square foot space, which serves as a site for roasting of some of the premium coffee lines. Customers are able to see the whole roasting and brewing process, with tubes running all around the space. Each roastery room is projected to produce 1.4 million pounds of Reserve coffee per year. ^[4] The menu items in these reserve stores are much more expensive than those in regular Starbucks stores. ^[5] Moreover, the company has introduced these Reserve coffees in most of the regular stores as well.

The company plans to expand this concept, targeting around 100 new Reserve-only store openings domestically. On the other hand, the company has introduced Reserve coffees in over 1,200 regular stores worldwide.

Expansion In Asian Markets

Starbucks reported an 8% y-o-y increase in comparable store sales in the China & Asia-Pacific (CAP) region in the December-ended quarter, primarily due to an increase in customers. 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. Starbucks opened 363 stores in China last year. 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 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. ^[6]

On March 18, Starbucks signed an agreement with Tingyi Holding Corp., a leading food and beverage producer in China, to manufacture and expand the distribution of Starbucks’ ready-to-drink (RTD) products. ^[7] The RTD coffee, coupled with energy sector, is a $6 billion category in China and is estimated to grow by 20% over the next 3 years.

Moreover, the company has announced its intent to acquire the remaining 60.5% of Starbucks Japan through a two-step tender offer process for about $914 million. 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 by the end of the second quarter of fiscal 2015, making Japan the company’s first international market outside North America. Japan is the company’s second largest market in terms of retail revenue, with 1,100 stores that have been averaging about 4% in comparable sales growth over the last 3 years. ^[8]

The company expects the revenue from CAP region to triple over the next 5 years, with strong growth opportunities in China, Japan and India.

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1. Starbucks Q2 2015, earnings conference call [↩]
2. Starbucks Q1 2015 earnings call transcript [↩]
3. Starbucks Investor relations [↩]
4. Starbucks Reserve Roastery and Tasting room creates sensory coffee experience [↩]
5. Starbucks Reserve Roastery and Tasting Room opens at the base of Capitol Hill [↩]
6. Starbucks China opens new flagship store; announces first-of-a-kind partner development program [↩]
7. Starbucks signs agreement with Tingyi Holding Corp. To expand in China’s $6 billion RTD coffee and energy category [↩]
8. Starbucks’ 2015 annual meeting of shareholders [↩]