Starbucks Reserve Stores & Accelerated Expansion Drive Q1 2016 Top-line Performance

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Starbucks Corporation (NASDAQ: SBUX) started off its fiscal 2016 on a strong note, as it reported comparable store sales growth in all its reporting segments. The highlight for the specialty coffee company was its development progress and future plans in Asian markets. From the introduction of mobile and digital payment in China to expansion plans in India and Japan, Starbucks seems all ready to start another chapter. Moreover, the launch of reserve stores in some high growth markets was another takeaway from the company’s earnings conference call. [1]

After the earnings results announcement, the investors did not seem very happy with the company’s performance, as the stock remained stagnant between the $58 and $59 range. Trefis price estimate for Starbucks is $66, which is roughly 10% above the current market price.

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Reserve Coffee & Premium Beverage Items Drove Beverage Spend

The introduction of reserve coffee by the company in December 2014 reaped huge benefits in 2015. Since the menu items in these Reserve stores are much more expensive than those in regular Starbucks stores, the beverage spend per customer visit was bound to increase. According to Trefis estimates, beverage spend per customer visit rose more than 10% year-over-year (y-o-y) in 2015 to $5.22, despite the decline in daily customer traffic per store, which was primarily due more to an increase in the number of stores. The company’s Seattle roastery managed to attract more customers and visitors while simultaneously acting as a platform for Starbucks’ ultra-premium reserve brand. The company seems positive in achieving its target of 500 reserve stores in key markets.

On the other hand, these stores also provide premium varieties of Teavana teas in order to increase customer awareness about the tea brand. This might further help the company in attracting customers who prefer tea. This new concept not only improved the comparable store sales in the Americas segment by 9%, but also improved the net customer traffic in the region by 4%. According to Trefis estimates, net beverage revenue improved by more than 16% in 2015 to $11.43 billion.

Expansion Plans Right On Track

Starbucks opened a net 513 company-operated stores globally taking the total count to 12,366 stores. The Americas segment added 171 net new stores in the December-ended quarter, whereas the China and Asia-Pacific (CAP) region added 281 net new stores over the same period. The interesting fact is that the majority of the new developments took place in the CAP region for both the company-operated, as well as licensed stores. There is no doubt that Asia is the next target for Starbucks, which is trying to make China its next focus segment. According to Trefis estimates, the average number of company-operated stores grew nearly 10% in 2015, whereas the average number of franchised stores increased by 6.3%. Starbucks has opened close to 2,000 stores in China’s 100 cities and is in-line with its target of opening 3,400 stores by 2019.

Apart from new store additions, Starbucks is confident with its new initiative in China, including the social gifting and digital Starbucks gifts. Moreover, the introduction of the loyalty program and expansion of ready-to-drink products in China are the near-term goals for the company.

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. The introduction of Teavana, with the brand name of Starbucks backing it up, might just be a game-changing move from the company. With close to 80 stores, the growth of the company in India is faster than any other region, as claimed by the company’s officials.

Strong store development in the CAP region, with a 5% increase in comparable store sales and a 4% increase in customer count, resulted in a 32% positive jump in the segment’s net revenues. The company further plans to double the store count in the CAP region to 10,000 by 2019. With similar intensity and such an accelerated pace, it is possible that the CAP region might actually become the most profitable segment for the company in the next 10 years.

Channel development Segment Continues Strong Momentum

In Q1 2016, the channel development segment posted 16% y-o-y increase in revenues, with 210 basis points improvement in operating margins. This robust growth is driven by ready-to-serve coffee and food service businesses. Each of the company’s at-home coffee segments outperformed the overall growth of the category, due to excellent performance in the holiday period. Starbucks’ holiday blend coffee was the fastest selling coffee in the company’s portfolio, in both the K-Cup and roast & ground segment. Starbucks’ K-Cup’s sales grew by 20%, resulting in market share increase to 17.2%, making it the highest selling K-Cup brand for the quarter. According to Trefis estimates, the segment’s revenues increased by 13.4% y-o-y.

Overall, it is a brilliant start for the industry leader, with a strong guidance for the coming year. Starbucks expects to open 1,800 stores in FY2016, with nearly half of them in the CAP region. Furthermore, the company expects a double-digit revenue growth in FY2016, with a slightly better comparable store sales growth.

Earnings Takeaways:

  • Q1 2016 revenues increased 12% y-o-y to $5.3 billion
  • Operating margins improved 60 bps to 19.%
  • 528 net new stores added
  • Americas operating income increased 14% y-o-y

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Notes:
  1. Starbucks, Q1 2016, Earnings call transcript []