Starbucks’ New Products Can Jolt Earnings Thursday

Starbucks Corporation (NASDAQ:SBUX) is set to announce its Q2 earnings on Thursday. This was an exciting quarter for Starbucks as the company introduced it much awaited Blonde Roast as well as opened the first juice bar Evolution Fresh, named after the juice company it acquired in 2011.

Apart from increased presence in Asia/Pacific, its global consumer products (CPG) is turning out to be a significant revenue growth driver. The stock has has surged more than 30% in 2012 itself, making it one of the best performing stocks on NASDAQ. Starbucks’ competitors in the broader market for coffee include McDonald’s (NYSE:MCD), Caribou Coffee (NASDAQ:CBOU) and Dunkin’ Brands (NASDAQ:DNKN).

We have a Trefis price estimate of $52 for Starbucks, which is around 10% below the current market price.

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Expect an Increase in Traffic

Starbucks added the lighter roast named Blonde to its stores in the U.S. Moreover, the company is experimenting with wine and beer and has introduced them in its select outlets. Starbucks will eventually extend it to other restaurants if it receives a positive feedback from its customers. The initial hype combined with Starbucks’ ability to successfully introduce new menu products should help increase the average footfalls.

Starbucks recently announced its plans to triple the number of outlets in China to 1,500 by the end of 2015 and double the number of restaurants in South Korea to 700 by 2016. The company will also launch its first outlets in India and Vietnam in 2012 itself.

Although the company-owned stores outnumber the franchised stores, Starbucks has increased its focus on the latter as it is a low investment and a high margin business. Margins for franchised stores are typically four times those of company-operated stores. A greater proportion of franchised stores will drive the overall margins for the company upwards.

CPG is a Key Division

Global Consumers Product (CPG) is turning out to be a key revenue growth driver for the company. CPG division includes ready-to-drink beverages such as Starbucks VIA Ready Brew, Starbucks coffee K-Cup packs, and Starbucks super-premium ice creams. Even the recently introduced Starbucks Blonde was introduced as a packaged product within its CPG division.

In 2011, the revenues for the division surged 37% to $1 billion, primarily due to full recognition of CPG revenues and transition of this division from in-house retailing to the direct distribution model (i.e. through groceries, drugstores and other retail channels). We expect the revenues for this division to grow at an annual rate of 10% helped by increase presence in retail stores, a strong brand name and new product introductions.

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