Strong Revenue Growth In China & Asia-Pacific Drives Starbucks’ Top-line Growth In Q2

Starbucks Corporation (NASDAQ: SBUX) posted strong numbers in its second quarter earnings report for the fiscal 2015, as the company reported record Q2 revenues. The company’s consolidated net revenues increased 18% year-over-year (y-o-y) to $4.6 billion. The coffee giant’s global comparable store sales rose 7%, with a 3% jump in customer traffic. All the company’s geographical segments delivered positive growth, with increase in customer traffic. As a result, Starbucks’ consolidated operating income jumped 21% y-o-y to $777.5 million, whereas the operating margins increased 40 basis points to 17%. Consequently, Starbucks’ GAAP and non-GAAP EPS rose 18% y-o-y to $0.33. ^[1]

Trefis estimates the stock price for the company at $45, which is roughly 13% below the current market price.

See our full analysis for Starbucks Corportion

Starbucks Reserve Stores To Provide Revenue Boost In Coming Years

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. ^[2] The menu items in these Reserve stores are much more expensive than those in regular Starbucks stores. ^[3]

The roastery is experiencing great customer and visitor response even after the first four months of its launch. The company is planning to open its second roaster store in 2016, with the city to be declared later this year. The incremental small batch coffee roasting capacity provided by the roastery helps the company in sourcing roast blend coffees from around the world, and thus, helps them in providing a rich coffee experience to the coffee lovers in the country. Starbucks is planning to expand the availability of Starbucks Reserve coffees to over 1,000 locations. The roastery provides the company the opportunity to launch 500 Starbucks Reserve stores around the world. Apart from providing super-premium coffees made by new coffee brewing methods, the stores will also include Teavana kiosks. This might gather consumer interest in super-premium loose leaf and packaged Teavana teas.

On the other hand, the company has introduced Reserve coffees in over 1,200 regular stores worldwide, to drive additional customer traffic. Starbucks now serves Starbucks Reserve coffees in around 136 locations across 10 markets in China and the Asia-Pacific (CAP) region.

Improved Comparable Store Sales

Starbucks’ global comparable store sales increased 7% in the second quarter, with a 3% rise in the customer traffic. In the U.S., the comparable store sales grew 7%, with 2% improvement in the customer count. In this segment, the company reported an 11% improvement in the revenue, with 17% y-o-y increase in the operating income. In the U.S., the company food sales grew 16% y-o-y, whereas the breakfast sandwich program showed 35% y-o-y growth, driven by increased sales of the new and innovative breakfast sandwich. This strengthened the company’s market share in the breakfast category. Apart from this, the lunch platform showed double digit growth as well.

The highlight of the quarter was the comparable sales growth of 12% in the China and Asia-Pacific region (CAP). This segment showed tremendous positive growth, with revenues increasing 124% y-o-y, and 29% y-o-y increase in the operating income. However, the operating margins dropped 1390 basis points y-o-y to 18.9%, due to the impact of the acquisition of Starbucks Japan.

In the Europe, Middle-East and Africa (EMEA) region, the comparable store sales grew 2%, with customer count rising by 2% and average customer spend rising 1%. In this region, the company plans on targeting more growth by introducing new food and beverage menu items, as well as by renovating the stores to increase the sales across all dayparts. In the second quarter, the EMEA revenues dropped 10% y-o-y, primarily due to unfavorable foreign currency translations and a shift towards more licensed stores. The segment’s operating margins improved 470 basis points to 10.4% in Q2. Starbucks is confident that EMEA’s operating margins will improve to the upper end of the range 10-12% during the fiscal 2015.

The company’s channel development segment also reported 16% y-o-y increase in sales and 23% y-o-y increase in operating income, driven by increased sales of premium single-serve products, premium packaged coffee, and premium packaged tea. Starbucks has shipped over 2.5 million K-Cup packs since the launch, and has continuously focused on product innovation, including the introduction of single Origami coffees. The company expects a further 150 basis points improvement in the operating margins for the segment in the fiscal 2015.

Aggressive Expansion Continues

Starbucks opened 210 net new stores in the second quarter, taking the total store count to 22,088. In Q2, the company opened the 5,000^th store in China and Asia-Pacific (CAP) region, and remains confident of doubling the CAP store count to 10,000 over the next 5 years. The company plans on opening the 1,600^th store in China later in April, and also on taking the country’s store count to 3,400 by the end of fiscal 2019. 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. ^[4] The RTD coffee, coupled with the energy sector, is a $6 billion category in China and is estimated to grow by 20% over the next 3 years.

Starbucks still targets to open 1,650 net new stores in the fiscal 2015, but expects to open 600 net new stores in the U.S., slightly lower than the previous guidance, as EMEA’s targets moves up slightly to 200.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Starbucks Q2 2015, earnings call transcript [↩]
2. Starbucks Reserve Roastery and Tasting room creates sensory coffee experience [↩]
3. Starbucks Reserve Roastery and Tasting Room opens at the base of Capitol Hill [↩]
4. Starbucks signs agreement with Tingyi Holding Corp. To expand in China’s $6 billion RTD coffee and energy category [↩]