Starbucks Ends The Fiscal 2015 With Stronger Comparable Store Sales

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Starbucks Corporation (NASDAQ: SBUX) gave another proof of its dominance in the industry after posting a robust growth in the fiscal 2015. The coffee giant reported its Q4 and fiscal 2015 earnings result on October 29. The company posted strong positive comparable sales growth in every geographical segment, with a global comparable sales growth of 8%, marking its 23rd consecutive quarter of more than 5% comparable sales growth.

With widening market share dominance in the coffee sector, introduction of coffee reserve stores, and an innovative mobile pay and order app, Starbucks is all set to further expand its strength and brand appeal in fiscal 2016. There are a few drivers that might be the key factors in the company’s road to dominance next year. Let’s discuss them in detail:

Our price estimate for Starbucks is $55, which is roughly 14% below the current market price. However, we are in the process of revising our estimates after the fiscal 2015 report.

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Reserve Stores: Bigger The Better

The concept of Starbucks’ Reserve stores is now almost one year old, and it is time when the concept starts bearing fruit for the company. The menu items in these Reserve stores are much more expensive than those in regular Starbucks stores. [1] The company opened a Roastery in Seattle in December 2014, and has plans to open a few more in major cities. The recently opened Reserve store in London is getting tremendous response from the customers.

Starbucks has been posting increased customer traffic for the last few quarters, despite the increase in prices of its coffee items. In Q4, the company witnessed a 4% increase in customer count, effectively resulting in 3% growth in the traffic for the fiscal 2015. [2] An increase in customer count coupled with more sales of the premium products might boost the revenue growth exponentially.

Trefis estimates the beverage spend per customer visit to rise by 1% y-o-y in 2015, whereas average daily customer per store is estimated to increase by 2% in 2015. The impact of these drivers on Starbucks’ valuation can be analyzed below:

Mobile Pay & Order: A Digital Approach

Starbucks’ mobile pay & order feature through an app is turning out to be an extremely positive move, as it has revolutionized the customer experience to a whole different level. With this breakthrough initiative, the company is somewhat extending its reach to more customers, and making it convenient for them to have a coffee-to-go. (Read: Starbucks Q4 Fiscal 2015 Earnings Preview: Three Drivers To Look Out For)

According to the company, mobile payments now account for 21% of the net transactions in U.S. company-operated stores. The number of company’s MSR (My Starbucks Reward) members grew 28% y-o-y in the U.S., whereas the active mobile app users in the North American region grew by 32% y-o-y.  The important takeaway is that this technology is only available in 7,500 company operated stores in the U.S. as of now, and still has a long way to go. No doubt, the feature has played an important part in the 8% comparable store sales growth in the Americas segment. Starbucks is planning to expand this feature to its stores in the U.K. and Canada as well. On the other hand, the company launched the mobile app on Android and iOS versions in France and Germany, and plans to deploy this feature in Poland, Czech Republic, and Kuwait in the coming few quarters.

This feature makes it convenient for the customers to order and pay, it will attract more customers, finally translating to an increase in customer traffic. Furthermore, operational efficiency and reduced credit card processing charges might boost the margins for the company-operated stores.

Accelerated Expansion In All Geographical Segments

In Q4 2015, Starbucks opened 524 net new stores globally, including the new markets, such as Panama and Azerbaijan. This takes the total count of net new stores for the fiscal 2015 to 1,677. With over 23,000 stores in roughly 68 countries, including 2,000 in China and 1,000 each in Korea and Japan, Starbucks further plans to expand its reach and strengthen its dominance in several of the target markets.

Earlier this year, 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. [3] In the fiscal 2015, Starbucks added 838 net new stores in the China Asia-Pacific region. With such a rapid growth and tremendous results, it is one of the primary target markets for the company. Moreover, the company stated that traffic growth in China is gradually outpacing the traffic growth in CAP (China Asia/Pacific) segment.

Starbucks plans to open 1,800 net new stores in the fiscal 2016, with almost 700 in the Americas segment, 900 in the CAP segment, and roughly 200 in the Europe, Middle-East, and Africa. We can expect most of the store development in the CAP region.

With so much positives to look forward to, and tremendous growth, the company might even jump the $100 billion market cap mark in the next fiscal year.

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Notes:
  1. Starbucks Reserve Roastery and Tasting Room opens at the base of Capitol Hill []
  2. Starbucks, Q4 fiscal 2015, earnings call transcript []
  3. Starbucks signs agreement with Tingyi Holding Corp. To expand in China’s $6 billion RTD coffee and energy category []