Starbucks’ Aggressive Expansion And Shifting Business Mix Are Keys To Earnings

Starbucks Corporation (NASDAQ:SBUX) is scheduled to announce its Q1 earnings on January 24. The second half of 2012 was eventful for Starbucks with the company launching its own single-cup brewer system called the Verismo, as well as acquiring the Atlanta based tea leaf company Teavana for $620 million. The company’s stock has gained almost 10% since its last earnings was announced. Here are some of the trends to watch out for in the upcoming earnings.

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Aggressive Expansion

Starbucks is planning to be aggressive with its expansion this fiscal year as it looks to open new restaurants in the U.S., China, Mexico, Costa Rica, India and the Nordic region. In total, the company will add 1300 new stores in fiscal 2013, up from 1,057 it added in the previous 12 months. The Americas and China/Asia Pacific will account for about 600 each. Starbucks’ global store count is expected to grow to more than 20,000 in the next two years from 18,000 currently.

The company has set its eye on China as a key market as it looks to grow the store count to 1,500 in the region, by the end of 2015. The world’s most populous nation will surpass Canada as the second most important market for the company in the next two years.

In the U.S., not all of the new set ups will be traditional Starbucks coffee stores, and we expect to see a fair number of Teavana and Evolution juice bars as part of the new additions. Starbucks is currently building a new production facility for Evolution, whose capacity will be four to five times that of the present facility. Once the construction is complete, Starbucks can accelerate the openings of juice bars under the Evolution brand.

For its traditional coffee stores, Starbucks plans to boost sales by expanding its food menu. Starbucks is in the testing phase of its La Boulange (acquired in June 2012) bakery products in select stores, and eventually plans to roll out the entire range in 2,500 of its company-operated stores across the U.S., beginning in the spring of 2013. ^[1]

Margins Could Widen

Overall, the company-wide margins should expand due to a rising proportion of licensed stores. Licensed stores usually have margins three or four times higher than those of company-operated stores so a greater proportion of licensed stores will have a tendency to expand the overall margins. More than half of Starbucks stores are company-operated currently, but the company has lately shown a preference to open more of licensed stores. Therefore, we expect the company-wide margins to improve this quarter.

Watch Out For Channel Distribution Segment

Starbucks’ channel development segment consists primarily of packaged coffee and tea such as VIA Ready Brew and K-Cup packs, which are then sold in grocery and retail stores. Revenues for the channel development business totaled $1.3 billion in the previous fiscal. The segment already has more than 100,000 distribution points across 20 countries, and the management expects the division to double the international footprint by 2015. Starbucks will be banking on single-cup servings such as the VIA, K-cups and the recently launched Verismo brewer to fuel sales growth of this segment.

We have a $58 price estimate for Starbucks, which is about 10% higher than the current market price.

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1. SBUX 10-k [↩]