Starbucks Profits Climb As American And Chinese Sales Soar

Starbucks Corporation (NASDAQ:SBUX) announced a very strong set of numbers in its third quarter earnings helped by strong growth in the U.S. and China. During the quarter, the company’s net revenues surged 13% to $3.7 billion while net income soared 25% to $418 million, or 55 cents a share. Starbucks now expects net income of $2.22-2.23 per share in fiscal 2013, up from its previous estimate of $2.12-2.18 a share. ^[1]

This is in stark contrast to other restaurant chains such as McDonald’s (NYSE:MCD) and Panera Bread, who posted weak sales in their latest earnings report and blamed the weak consumer spending environment for their tepid performances.

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Starbucks’ operating margins widened 150 basis points to 16.4%. Besides having a higher proportion of licensed stores (which usually have margins two to three times those of the company-operated stores), Starbucks also benefited from lower coffee costs. The company’s most important raw material, namely arabica coffee, is trading near a three and a half year low. Arabica prices aren’t expected to rebound anytime soon, so the company’s margins will remain firm in the near term.

Americas Shine

Comparable sales in the Americas region comprising of its operations in North and South America grew by a stunning 9%. For a mature restaurant chain, such numbers are unheard of. Some of the recent quarters have seen Starbucks posting comparable sales in the region of 6-7% and there was no assurance that even those numbers will be sustainable. But the latest results highlights the extent to which the company is doing things right.

The 9% figure was achieved by an 8% rise in the traffic and a 1% increase in the average ticket price. More and more Americans are using smartphone technology to make purchases at their favorite restaurant chains. Starbucks claims 10% of its payments are made through smartphones. Paying through mobile phones allows customers to skip queues, the effect of which was pretty much evident on the traffic volume.

In addition, the expanded food menu is also attracting more traffic. By the end of the third quarter, La Boulange products were available in 1,076 of its company-operated stores across the U.S. 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 or comparable sales 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.

China Sizzles

Revenues in the China/Asia-Pacific region soared 30%, helped by new restaurant additions and a 9% comparable sales growth.  In a couple of years, China will overtake Canada as the company’s second biggest market after the U.S. Starbucks plans to add another 700 stores in the China/Asia Pacific region in the next fiscal (i.e. Oct’13-Sept’14). In total, the company will open about 1400 new stores globally.

Besides localizing the menu, Starbucks is also targeting the younger and the more affluent demographic in China since the idea of spending $3-4 on a cup of coffee is unaffordable to many in the tea drinking nation.

Starbucks’ stores in Asia now contribute almost 15% to the bottom line. Usually, the margins in new markets trail those in the mature markets since it takes some years to optimize store level economics and generate the required level of sales. But the rate at which the top line and the bottom line is rising in the region highlights the popularity of Starbucks in these countries. As more Starbucks stores mushroom in China and India, the region’s contribution to the total profits will only grow.

Packaged Product Sales Rise

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. While the growth of this division moderated to 8.8% in the quarter, it is still up 11.8% in the first three quarters of the fiscal combined. In the latest quarter, Starbucks announced a partnership with the French giant Danone, which will see the company launching new specialty yogurt products (such as greek yogurt) beginning from next year. This division should continue to witness impressive growth as the company keeps expanding into new geographies and rolls out new products.

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