Starbucks Results Were Short When The Market Wanted A Venti

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Starbucks Corporation (NASDAQ:SBUX) announced its Q3 earnings which showed signs of a slowdown as the company cut its Q4 forecast to 44-45 cents a share. For the third quarter, total revenues stood at $3.3 billion, an increase of 12.7% y-o-y. Revenue growth was helped by an accelerated rate of store openings and healthy comparable sales growth. Net income jumped 19.1% to $333 million. [1]

For fiscal 2013, Starbucks expects an EPS to be in the range of $2.04 to $2.14; lower than the general market consensus, which sent the stock tumbling 10% to $47. Note that Starbucks has a fiscal year from October to September whereas we forecast our results on a calendar year basis. We have a $55 price estimate for Starbucks currently, but we are in the process of revising our estimates to incorporate Q3 earnings.

Expanding Global Presence

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Starbucks added 231 new stores globally in the third quarter itself. For fiscal 2013, it plans to add 1200 new stores; half of them in the Americas, 500 in China/Asia Pacific and the remainder in EMEA (Europe, Middle East and Africa). The majority of the new stores will be licensed / franchised.

Global comparable sales grew 6% helped by strong performances in Americas as well China/Asia Pacific. Comparable sales growth for EMEA was flat. Comp sales were helped by a 5% jump in the number of footfalls which is line with our expectations.

Operating margins widened which is natural since most of the new additions are franchised stores. Franchised stores have much higher margins than those for company-operated stores so a higher mix of franchised stores will result in higher overall net margins. Thus, the widening margins are no guarantee of an improved performance. The company reported operating margins that jumped to 14.9% from 13.7% (y-o-y). For fiscal 2013, the company expects the margins to further improve by 50-100 basis points.

Enhanced Distribution of Packaged Products

Top line growth was also helped by expanding distribution of packaged coffee and tea  products such as VIA Ready Brew and K-Cup packs (which even includes Blonde), available in grocery and retail stores. Revenues for the channel development segment jumped 44.9% to $316.4 million. However, the figures are somewhat amplified by full recognition of revenues from the earlier method of only partially recognizing this segment’s revenues. In 2011, Starbucks transitioned the retail of CPG products from in-house retailing (i.e. retail through its own stores) to a direct distribution model (i.e. through groceries, warehouse clubs and drugstores). Once the impact of the full recognition of revenues is discounted in the subsequent quarters, we should see the revenue growth rate falling to more feasible levels.

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Notes:
  1. SBUX 8-k []