Starbucks U.S. Growth Will Remain Solid While Overseas Expansion Continues

Starbucks Corporation (NASDAQ:SBUX) is scheduled to announce its earnings on July 25. The stock has gained almost 20% in the last three months on the back of solid earnings and an improving U.S. economy. Starbucks aims to generate top line growth of around 10-13% for fiscal 2013 (i.e. Oct’12 to Sep’13). It also raised its full year earnings guidance to $2.12 to $2.18 per share, from $2.06 to $2.15 during the previous earnings call. Overall, Starbucks’ strategy of diversifying its offering in the mature American market while leveraging its brand to expand internationally seems to be paying off.

Some of the recent buoyancy in the Starbucks’ valuation is also attributable to low coffee prices. The company’s most important raw material, namely arabica coffee, is trading near a three and a half year low. Lower coffee prices are bound to benefit the company’s bottom line.

See our full analysis for Starbucks

Solid On The Home Turf

Starbucks’ same-store sales in the U.S. have consistently grown 6-7% over the last few quarters, which is quite impressive for a chain that has close to 10,000 stores in the country. Starbucks will look to boost the sales of its food products with the help of an expanded menu, which has been created with the help of La Boulange, a $100 million San-Francisco based bakery chain that Starbucks acquired last year.

By the end of 2013, the extended menu will be available in about 3,500 of the company-operated stores in the U.S., and by the end of next year, these will be rolled out in all of its company-operated stores across the country.

Same-store sales growth is an important parameter to gauge a restaurant chain’s performance since it excludes the effect of currency fluctuations and only includes the restaurants open for more than a year. The sales of newly opened restaurants could be unusually high or low and can distort the overall revenue/store figure.

Global Expansion On Track

Starbucks plans to open 1,650 new stores in fiscal 2013, including the 350 additional stores purchased as a result of the Teavana acquisition. Most of the additions will be in the Asia Pacific and the Americas region. ^[1] China, as expected, will be a key part of its global expansion as the company looks to grow the store count in the nation to 1,500 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.

Watch Out For Packaged Products

Sales of Starbucks’ channel development segment consist of packaged coffees and teas such as VIA Ready Brew, K-cups, and brewers, available in grocery and retail stores. With revenues of this segment totaling $1.3 billion in 2012, the division has begun to make a mark on the company’s income statement.

Starbucks plans to double the international footprint of this segment within the next two to three years. ^[2] While the growth of this division moderated to 7% in the previous quarter, it was still up 10% in the first two quarters of the fiscal combined. This division should continue to witness impressive growth as the company keeps expanding into new geographies and rolls out new products.

We have a $58 price estimate for Starbucks, which is about 15% below the current market price.

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1. SBUX 10-k [↩]
2. Starbucks Unveils Accelerated Global Growth Plans, December 5, 2012, news.starbucks.com [↩]