Starbucks Earnings Preview: Margins To Widen Although Sales Could Slow Down

Starbucks Corporation (NASDAQ:SBUX) is scheduled to announce its Q1 earnings on January 23. The past year has been excellent for Starbucks with shares of the company rising almost 40% on the back of strong earnings and aggressive expansion plans. During the previous earnings release, the company announced that it was targeting an income of 67 to 69 cents a share for the first quarter of fiscal 2014 (i.e. Oct’13-Sept’14). For the entire fiscal year, Starbucks estimates an earnings of $2.55 to $2.65 per share. Just for comparison, the company’s earnings in the previous fiscal year stood at $2.26 per share. ^[1]

We  have a $72.57 price estimate for Starbucks, which is about 5% below the market price.

Sales To Slow Down ?

Starbucks stunned investors during the previous earnings release after announcing that its same-store sales in the U.S. had risen 9%. This is extremely high for a mature restaurant chain. In the quarters preceding that, Starbucks’ had posted sales gains in the region of 6-7%, which is again very impressive. Given that management expects to add another 1,500 restaurants in fiscal 2014, a guidance of 10% revenue growth looks conservative. This is probably because the company expects the same-store sales to down.

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.

However, the company could once again surprise the markets as it benefits from rising sales of new bakery products launched under the La Boulange brand. By the end of 2013, the extended menu was rolled out at about 3,500 of the company-operated stores in the U.S., and by the end of 2014, these items will be rolled out in all of its company-operated stores across the country.

Aggressive Expansion Plans

A significant portion of the incremental income could come from China as the company looks to open new stores as well as optimize the sales of the existing ones. A whopping 750 might be added in the ongoing fiscal in the China/Asia Pacific region. By 2015, China will surpass Canada to become the second largest market for Starbucks after the U.S.

Another 600 stores will be added in North and South America. In total, Starbucks plans to about 1,500 stores. In adding these many stores, Starbucks expects to incur a capital expenditure of $1.2 billion. ^[1]

Margins Set To Improve

For fiscal 2014, Starbucks expects its operating margins to widen 150 to 200 basis points over the previous fiscal. Margin expansion should occur primarily due to two reasons:

a) Low coffee prices have benefited Starbucks in recent times, with the favorable impact of low cost of raw materials standing at $97 million in fiscal 2013. For the ongoing fiscal, Starbucks expects a benefit of another $110-120 million as a result of subdued coffee prices. ^[2] Companies usually lock the supply for the future during times when coffee prices are low.

b) Greater proportion of licensed restaurants: Two-thirds of the new openings are expected to be licensed. At the end of fiscal 2013, close to 50% of the restaurants were licensed. A rising proportion of licensed restaurants will tend to push up the overall profitability since licensed stores usually have margins three to four times those of the company-operated restaurants.

Packaged Products Likely To Grow At A Rapid Pace

Although Starbucks makes most of the headlines through its store expansions and new acquisitions, the company has done well to grow the operations of its packaged products, labeled under the channel development category. Generating more than $1.3 billion in revenues in the previous fiscal year, the channel development segment accounts for about 10% of the company’s revenues.

Starbucks has ambitious plans of doubling its international footprint for this segment in the next two to three years starting from 2013. This division should continue to witness impressive growth as the company keeps expanding into new geographies and introduces new products. For example, last year Starbucks tied up with Whole Foods to make its Evolution juices available at the retail giant. Similarly, the company has also partnered with French company Danone to launch greek yogurt. ^[3]

See our full analysis for Starbucks Corportion

Understand how a company’s products impact its stock price at Trefis

1. SBUX 8-k [↩] [↩]
2. Starbucks Predicts $120M Benefit from Falling Coffee Prices, November 19, 2013, ibtimes.com [↩]
3. Starbucks Joins Yogurt Craze, Teaming Up With Dannon, July 23, 2013,wsj.com [↩]