Monthly Notes On The Coffee Industry: Starbucks & Dunkin’ Brands

On account of last week’s news of the Chinese slowdown, many commodities took a plunge in the market, as many risk-averse investors pulled out from a majority of the stocks and some of the commodities. With fear that the slowing Chinese economy could drag the world towards a new recession, the Bloomberg Commodity Index dropped to further lows. ^[1] The September 2015 futures for coffee touched 117 cents/lb further lowered by the strong dollar. ^[2] On the other hand, Arabica prices for the December contract dropped to 124 cents/lb. ^[3]

Here are some updates related to coffee companies covered by Trefis:

Starbucks

In the latest quarter earnings (June-ended), Starbucks reported a massive 18% year-over-year (y-o-y) increase in revenues to $4.9 billion, driven by 7% growth in comparable store sales. Mobile payments, the introduction of ultra-premium coffee through its Reserve stores, and an increase in customer traffic with improved average spend, are some of the reasons for Starbucks’ knockout performance in the quarter. ((Starbucks, Q3 2015 earnings call transcript)) The introduction of premium and ultra-premium reserve coffee positively drove the average transaction by 4% y-o-y, resulting in a 120 basis points improvement in operating margins.

The highlight of the earnings was the rapid growth of the company’s mobile payment and ordering initiative, which is now available in 4,000 of Starbucks’ U.S. company-operated stores. Starbucks has roughly 10.4 million active My Starbucks Reward members, up 28% y-o-y, with 6.2 million Gold members, up 32% y-o-y. This resulted in an increase in average transactions during the quarter.

SBUX stock traded between $56 and $59 for the major part of August before falling to $50 on news of the Chinese slowdown. Our price estimate for SBUX is $55, which is roughly the same as the current market price.

Dunkin’ Brands

Dunkin’ Brands reported strong comparable store sales growth in the domestic market in the second quarter but witnessed a dull performance by its international segments.  Dunkin’ Brands’ net consolidated revenue for the quarter rose more than 10% year-over-year (y-o-y) to $211 million, with diluted EPS of $0.44. ^[4] The company mentioned that its business in South Korea, which accounts for a major portion of sales for both brands internationally, was affected due to the outbreak of the MERS virus and are expecting some lingering impact in the third quarter as well. ^[5]

DNKN stock gradually dropped from $55 to $50 during the first three weeks of August before rising back up to $51.70. Our price estimate for DNKN stock is $57, which is roughly 4% above the current market price.

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More Trefis Research

1. Bloomberg Commodity Index [↩]
2. Daily commodities future price charts [↩]
3. China’s slowdown triggers commodities slump [↩]
4. Dunkin’ Brands, Q2 2015, earnings call transcript [↩]
5. South Korea MERS outbreak [↩]