Starbucks: Accelerated Expansion Growth in Asian Markets To Be The Highlight For 2016

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SBUX: Starbucks logo
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Starbucks Corporation (NASDAQ: SBUX) is playing its cards at the right time. After proving its dominance in the industry once again after posting robust growth in the fiscal year 2015, the coffee specialist now plans to increase its penetration in the Asian markets. Starbucks is scheduled to report its Q1 earnings results for fiscal 2016 on January 21, 2016. [1]

All the eyes will be on the company’s current progress and future plans regarding the expansion in China and India. SBUX stock has been one of the top performers last year with a tremendous 45% jump over the last twelve months.

sbux st

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Our price estimate for Starbucks is $63, which is roughly 10% above the current market price.

See our full analysis for Starbucks Corporation

Let us have a look at Starbucks’ performance in the calendar year 2015, and the factors that drove the stock.

Reserve Stores Drove Customer Traffic & Revenues

In December 2014, Starbucks introduced a new concept of the  reserve stores and opened its first ‘Starbucks Reserve Roastery and Tasting Room’ in Seattle. While the concept is aimed at enriching the experience of coffee lovers, it also provides a huge opportunity for the company to reap additional benefits from these premium items. [2] The menu items in these Reserve stores are much more expensive than those in regular Starbucks stores. [3]

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. Due to the introduction of premium and ultra-premium reserve coffee, the average transaction in the June-ended quarter improved by 4% y-o-y in the Americas segment, resulting in a 120 basis points improvement in operating margins.  Moreover, it led to 8% growth in the comparable store sales and 4% increase in customer traffic for the segment. (See: Digital Payments & Ultra-Premium Coffee Drive Revenue Growth For Starbucks In Q3) Furthermore, in the September-ended quarter, the customer traffic rose 4%, effectively leading to a 3% growth in the customer count for the fiscal 2015. (See: Starbucks Ends The Fiscal 2015 With Stronger Comparable Store Sales)

Not only did the revenues for the Americas segment improve drastically, but it paved the way for further performance improvement in other segments, when the company will finally take this concept to international markets.

Americas March-ended Quarter June-ended Quarter September-ended quarter December-ended quarter
Quarterly revenues (in millions)

$3,128

$3,415 $3,384

?

Year-over-year growth

+11%

+12% +11%

?

 

As evident from the table above, the revenues for the Americas segment improved by 11-12% over the first three calendar quarters. A similar performance in the December-ended quarter is highly likely, and it will further boost the overall revenues. Trefis estimates the company’s net revenues for 2015 to grow more than 20% to cross $20 billion.

sbux rev

Digital Payments: A Successful Initiative

Starbucks’ mobile payment and ordering initiative proved to be a huge success last year and has become a convenient option for customers. Fast and efficient service has positively impacted the customer count throughout the year. According to the company, mobile payments account for 21% of the net transactions in U.S. company-operated stores. The number of the 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.

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.

On the other hand, the company plans to build locally relevant Starbucks 4th-place Experience in China that integrates Starbucks’ unique store experience with digital innovation. [4] Moreover, Starbucks opened its e-flagship store in Alibaba’s Tmall (B2C platform), offering a social gifting platform to its Chinese customers. Starbucks claims that its e-store on Tmall registered more than 300,000 fans and became the top performing brand in Tmall’s “Food and Beverage” category in the first month.

Trefis estimates the average daily customer count per store to increase by 3% in 2015.

Expansion to Asian Markets On Fast Track

As a part of its international expansion plan, especially in Asian markets, Starbucks took full ownership of its Japan unit in 2014, resulting in 124% year-over-year (y-o-y) increase in the company’s Q2 revenues and 29% y-o-y growth in the operating income. (See: Strong Revenue Growth in China & Asia-Pacific Drives Starbucks’ Top-line Growth in Q2) Over the first 9 calendar months of 2015, the company opened more than 1,100 stores, which is roughly the same as that over the first 9 months of 2014. During the first calendar quarter, Starbucks opened the 5,000th store in China and the Asia-Pacific (CAP) region, and remains confident of doubling the CAP store count to 10,000 over the next 5 years. Moreover, the company has surpassed the target of 1,700 functional stores in over 90 cities in mainland China. The company expects revenue from the CAP (China and Asia-Pacific) region to triple over the next five years, with strong growth opportunities in China, Japan, and India.

 

Recently, the company mentioned its plans to bring its specialty tea brand, Teavana, to India in 2016. India is a major consumer of tea and Starbucks has been a huge success in the country. Introduction of Teavana, with the brand name of Starbucks backing it up, might just be a game changing move from the company.

In short, we can expect the company to get off to a good start in 2016. However, the highlight in this earnings conference will still remain the expansion plans and guidance for the next quarter.

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Notes:
  1. Starbucks Q1 2016, earnings conference call, Investors relations []
  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 strengthens commitment in China []