Will Starbucks’ Cost Saving Initiatives Help Expand Margins?

January 18th, 2017 by Trefis Team
+14.89%
Upside
87.61
Market
101
Trefis
SBUX: Starbucks logo
SBUX
Starbucks

Starbucks is at the cusp of great changes, with the old CEO Schultz stepping down and the new CEO Kevin Johnson taking hold of the reins. Along with the change in leadership, the company has talked about a new five-year plan, which pivots on a five-part strategy. In a series of articles, we have already discussed the important role digital developments will play towards integrating the Starbucks customer experience, expansion of Starbucks’ store portfolio across different geographies and its affect on sales, increasing reliance on consumer packaged goods for revenue growth, impact of product innovation and brand elevation on sales, and the dependence on China as the engine of future growth.

In the period between FY 2013-2016, Starbucks grew its revenues at a CAGR of 12% y-o-y to $21.35 billion. The rise in sales was facilitated through increased store presence which grew to approximately 24,700 at the end of FY 2016. However, the company’s margins didn’t see a consequential improvement during the period, despite a 17% y-o-y improvement in operating income, due to rising costs.

0401178

Relevant Articles
  1. Down 7% Since 2023, Can Starbucks’ Stock Reverse This Trend Post Q1 Results?
  2. Down 26% From Its Pre-Inflation Shock High, What Is Next For Starbucks Stock?
  3. After 6% Drop This Year, Pricing Growth To Bolster Starbucks’ Q4
  4. Can Starbucks Stock Return To Pre-Inflation Shock Highs?
  5. Starbucks’ Stock To See Little Movement Past Q3?
  6. Starbucks Stock To Likely Trade Lower Post Q2

Under the guidelines of its five-year growth plan, Starbucks has laid down a strategy to control costs in order to expand margins. As a part of its strategy to control costs, Starbucks has revised some of its targets. However, according to our analysis, these initiatives may not necessarily improve upon the ones announced in FY 2014, resulting in only a minimal improvement in margins. Following is the synopsis of the analysis:

  • Cost of Sales

Instead of $1 billion cost saving announced between 2014-2018, the target has been revised to $1.4 billion between 2015-2021. Although in absolute terms, the number may seem larger, but when broken down per year, the earlier target meant savings of $250 million in each year until 2018, as opposed to $200 million until 2021 now. Furthermore, the cost of sales considered excludes the occupancy cost involved in operations.
0401179

0401177

*excludes occupancy cost and the effect of 53rd week of Q4 2016

  • General and Administrative Expenses

The target for general and administrative expenses has also been revised. In FY 2015, total G&A growth was pegged to 50% of the revenue growth rate. Although the target has remained the same, the G&A expenditure now excludes non-routine items and other company initiatives. Consequently, we can expect the rise in total G&A to be more than previously expected.

0401176

Accordingly, we don’t expect a significant improvement in operating margins as per the announced cost saving measures, despite the 10% y-o-y rise in revenues and almost doubling of operating income  until FY 2021. The likely expansion in margins may be limited to 200-300 basis points in the period FY 2017-2021.

04011710*FY 2016 operating margins exclude the impact of the 53rd week of Q4

Have more questions on Starbucks? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Starbucks

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology