Starbucks Delivers Strong Figures Again: Sales and Margins Rise

by Trefis Team
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Starbucks Corporation (NASDAQ:SBUX) continued with its streak of announcing strong quarterly earnings and boasted about recording its 17th consecutive quarter with above 5% comparable sales growth. In Q2 fiscal 2014, Starbucks recorded a global comparable sales growth of 6% and a revenue of $3.9 billion. 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 restaurants operating for more than a year. In a quarter riddled with extreme weather and and in an industry with tough competition, Starbucks has been recording sales and revenue growth. The company seems to be gaining momentum and with its aggressive expansion plans, is expected to post impressive sales and profits in the coming months. For fiscal 2014, Starbucks is targeting a 10% revenue growth and a mid-single-digit global comparable sales growth.

We have a $73.63 price estimate for Starbucks, which is about 4% above the market price.

See our full analysis for Starbucks Corportion

Comparable Sales To Continue Surging

In the Americas segment, Starbucks saw a 6% rise in same store sales, and an 8% year-over-year increase in quarterly revenue. In Q2 fiscal 2014, the company grossed $2.8 billion from the Americas. Its move into the breakfast segment and the launch of bakery food items has helped increase the average ticket price and the store traffic. Starbucks aims at completing the bakery rollout throughout its licensed stores in the U.S. this year. The mobile payment app of the company is also gaining traction in the market, with over 10 million customers already using it.

Starbucks also reported great sales in Europe, the Middle East and Africa (EMEA) region, as well as in China and the Asia-Pacific (CAP) segment. The comparable sales in EMEA rose by 6% this quarter, while CAP’s comparable sales rose by 7%. The strong sales in CAP were mainly driven by high traffic in China, offset by a dismal performance in Thailand due to the political instability there.

Starbucks’ plans of expanding its Evening program, wherein it serves wine and alcoholic beverages, to about 1,000 stores this year. In addition, it plans to launch ‘Fizzio’, its cold carbonated beverages, this summer throughout its stores in the U.S. sunbelt, Singapore, Korea and China. This could see the company recording a higher traffic in the next quarter.

Widening Margins

In Q2 fiscal 2014, Starbucks had record operating margins of 16.6%, 1.3% higher than last year.

Last year, Starbucks had purchased its green coffee bean stock in advance at low prices. Its coffee beans inventory is good for 2014 and about 40% of that for 2015 as well. This hedging has protected the company from the recent hike in coffee prices caused due to a supply constraint after drought in Brazil. This has significantly contributed to widening margins.

The strong performance of licensed stores has also helped in boosting the operating income and margins. Starbucks does not incur any operating costs for its licensed stores, and charges them franchise fee and royalties, which are a percentage of the store sales. High top line growth for the licensed stores has led to an increase in the franchise royalties for the company, boosting its revenues.

We expect the operating margins to continue widening as the company’s sales are gaining momentum, with Starbucks plans on opening around 1,500 stores this fiscal year. The company will enjoy the price advantage due to its coffee bean stock, till early next year, by which time the coffee prices might recede to a lower level.

Expansion Plans on Track

Starbucks opened 335 outlets globally in Q2 fiscal 2014, bringing the total count of stores to 20,519. The company is targeting to open 1,500 new outlets this fiscal year, with half of them in the emerging markets of CAP. It estimates a capital expenditure of $1.2 billion in doing so.

Apart from planning to expand its Starbucks stores, the company is also planning on opening Teavana Tea Bars in Chicago, Los Angeles and New York. Tea, being the most consumed beverage in the world, is a lucrative $90 billion market. If Starbucks succeeds in building Teavana similar to its coffee chain, the company can go on to dominate this space in the near future.

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