Starbucks (SBUX)

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Comparable Sales Growth Remain Slow

Starbucks could not meet revenue growth expectations for Q1 2018 as comparable sales growth remained slow. Disappointing holiday sales in the U.S. and declining mall traffic were the primary reasons for this slow growth. With the challenges faced in Q1 2018, the company expects to be in the lower end of its long term comparable sales guidance (3-5%) in 2018 and expects total operating margins in the Americas to decline moderately compared to the previous year.

China Continues To Drive Growth

China remains a key pillar of Starbucks’ growth. In Q1 2018, comparable sales growth in the region stood at 6%. China's GDP is expected to exceed $15 trillion by 2021 and Starbucks’ partnership with Alipay and WeChat in China and its East China acquisition are likely to aid the company in taking advantage of the growing middle class in the country – which is its major customer base.

Technology Advancement and Innovation Continues

Starbucks has expanded its capacity at peak and is now able to offer its Mobile Order and Pay capability to all customers. The company is increasing its marketing efforts to expand its digital customer relationships in the first calendar quarter of 2018. This is likely to impact customer traffic and transactions positively. Its Nitro-cold brew has shown positive results and the company now plans to roll out this beverage in 2,300 U.S. stores by the end of this year.

Changes in U.S. Tax Laws Will Impact Starbucks Positively

The changes in the U.S. tax laws are likely to impact Starbucks positively. The company expects the effective tax rate to be 7 points below its earlier guidance, leading to a slightly higher EPS (Earnings per share).


Below are key drivers of Starbucks' value that present opportunities for upside or downside to the current Trefis price estimate for Starbucks:

Company Owned Stores

Company Operated Stores EBITDA Margin :The margins improved to 18.7% in 2010 from 16.5% in 2009 due to restructuring and store closures. However, in 2011, the margins dropped to 17.5%, primarily due to high coffee prices. In 2012, they remained relatively stable. In 2013, the margins increased to 20.6% as a result of low arabica coffee prices, and further to 22.3% in 2014. In 2015, however, coffee prices shot up resulting in margins again coming down to 21.9%, and further to 21% in 2016.While we expect the margin to remain in the range of 20-21% over our forecast period, higher coffee prices can impact the margin adversely. If the company's margins are pressured downwards to 18.0%, due to rising coffee prices there can be a 10% downside to the Trefis stock price. However, if the arabica coffee price rally halts and tests new lows, margins may improve to 26.0%, leading to an upside of 13% to the Trefis valuation.


Starbucks is the world’s leading roaster and retailer of specialty coffee. Through its global network of owned and franchised coffee retail outlets, Starbucks offers a wide range of products like high-quality whole bean coffees, freshly brewed coffees, Italian-style espresso beverages, cold blended beverages, food items like sandwiches, premium teas, and coffee making equipment.

Starbucks' own stores are located near offices and residential areas and are larger in size, compared to its licensed stores that are much smaller and mostly located at airports and supermarkets.

Starbucks also sells its packaged coffee and tea through retail channels such as grocery stores, warehouse clubs, convenience stores, and US food service accounts.


The Company Operated Stores division is more valuable than the Franchise Stores division for Starbucks because of the following two reasons:

Company operated stores generate more revenues than franchised stores

Starbucks makes money through its company-owned stores as well as through franchise fees and royalties from franchised stores. Starbucks earns higher profit margins from franchised stores compared to company-owned stores because there are no operational and employee costs involved with franchised stores, hence Starbucks gets to keep the entire royalty & rent fee without paying for any costs.

Revenues earned from Starbucks' company owned stores are much higher than the franchised stores. This is because, although there are costs involved, Starbucks owns 100% of the revenues from its own restaurants, while it gets a percentage of the revenues (in the form of royalty fees) from its franchised restaurants.

Number of company owned stores comparable to franchised stores

Food & beverage companies, in general, increase their reach and profits by having a large base of franchised stores. For example, McDonald's has four times more franchised restaurants than company owned restaurants, making the franchise business more valuable to its stock. However, Starbucks has almost an equal number of company owned stores and franchised stores. As of October 2017, Starbucks had 13,275 company-owned stores and 14,064 franchised stores making a total of 27,339 stores.


International expansion fueling growth

Most of the new restaurants the company plans to open are in China/Asia Pacific. The number of Starbucks outlets in these countries are only a fraction of what they are in the U.S. New outlets opened will be a mix of company-operated and franchised restaurants. The company plans to take the store count in China to 3,400 by 2019. Shanghai alone has 320 Starbucks stores. Starbucks plans to double the store count in China & Asia-Pacific to 10,000 by 2019.

Ease and convenience of payment through mobile apps helping domestic sales

In Q4 2017, Starbucks' mobile order and pay reached 10% of transactions in its U.S. company operated stores. Consumers can load the money on to the app and then present a 2D bar code to pay at the register. With this app, it’s easy to pay with a phone, track purchases, and view one's My Starbucks Rewards Stars and rewards.

Starbucks Reserve coffee initiative boosts revenue growth

In December 2014, Starbucks introduced a new concept and opened the first ‘Starbucks Reserve Roastery and Tasting Rooms’ in Seattle. Moreover, the company has introduced Reserve coffees in over 1,200 regular stores worldwide, to drive additional customer traffic. Starbucks now serves Starbucks Reserve coffees in around 136 locations across 10 markets in China and the Asia-Pacific (CAP) region. Reserve coffees are more expensive than regular coffee items, and the company is trying to expand the initiative throughout the U.S. stores.

Recent Trefis Articles

Is Nestle Overvaluing Starbucks’ Packaged Goods Business?

Starbucks (NASDAQ: SBUX) and Nestle announced plans for a $7.2 billion license deal that would allow the latter to market, sell, and distribute the coffee giant's brands in Consumer Packaged Goods (CPG) and Foodservice. ...More

Starbucks Reports Growth In Sales, But A Contraction In Margins In The Second Quarter

Starbucks (NASDAQ: SBUX) reported its second quarter results on April 26, wherein earnings were in-line with consensus estimates, while revenues topped expectations. The revenue growth was driven by China, where comparable sales rose 4%, and it is this region on which the company has pinned its hopes. ...More

Will China Again Drive Growth For Starbucks In The Second Quarter?

Starbucks (NASDAQ: SBUX) is scheduled to report its second quarter (three months ended March 2018) earnings on April 26, wherein a rise in both revenues and earnings is anticipated. ...More

Starbucks Misses Revenue Expectations For Q1 2018, Comparable Sales Disappoint Again

Starbucks (NASDAQ: SBUX) reported its Q1 2018 results on January 25th 2018 and the company fell short of consensus revenue expectations, reporting a 6% year on year growth in revenues, against the expected 8%. Comparable sales growth remained at 2% (in line with the numbers in 2017) despite strong comparable sales of 6% reported in China. ...More

Here’s What We Are Watching For In Starbucks’ Q1 2018 Results

Starbucks (NASDAQ: SBUX) will announce its Q1 2018 results on Thursday January 25th 2018 and after the company lowered its long term growth target (as part of the  fiscal year 2017 results announcement), we will be keenly watching the comparable sales — especially customer traffic and revenue growth figures for Q1 2018. ...More

Should Starbucks Consider A Franchisee Model To Drive Growth?

Most restaurant companies either already have or are adopting a 100% franchised model to aid growth. McDonald’s has improved its profitability significantly by moving towards a 95% franchised model, since company owned restaurants need higher capital expenditure and costs in terms of labor and oth... ...More

Here’s Why Store Expansion Is Crucial For Starbucks’ Valuation

Starbucks (NASDAQ: SBUX) is expanding aggressively, especially in China, however the company is struggling to grow revenues from existing stores with declining comparable sales. Based on its 2017 fiscal year results, the company has revised its comparable sales growth numbers to the range of 3% to 5%. ...More

Here’s How Starbucks’ “Financial Services” Products Can Drive Growth For The Company

One of Starbucks' (NASDAQ: SBUX) key growth strategies is its “digital flywheel” where the company is using technology to establish digital relationships with its customers. These relationships have proven to be extremely effective in generating demand for the company and Starbucks is working on several measures to keep the momentum going. ...More

Here’s How Opening Up Its Mobile Order & Pay To All Customers Can Impact Starbucks

Starbucks' (NASDAQ: SBUX) mobile order and pay platform has been a mixed bag. While the company pioneered this concept which became a key sales driver for Starbucks, it also caused congestion problems at the hand-off plane, impacting comparable sales negatively. ...More

Here’s Why We Have Revised Our Price Estimate For Starbucks To $52

Starbucks (NASDAQ: SBUX) reported its fiscal year 2017 results in November 2017 and based on those numbers we have updated our model to reflect the company’s latest financials and future guidance.  The company has been struggling to grow comparable sales as it faces operational issues in its restaurants and competitive pressures. ...More

Starbucks Disappoints Again In Q4 2017, Lowers Long Term Growth Target

Starbucks (NASDAQ: SBUX) announced its Q4 2017 results on November 2nd and the company narrowly missed consensus revenue estimates of $5.8 billion, reporting revenues of $5.7 billion in Q4 2017. While comparable sales growth in the U.S . ...More

Here’s What We Are Watching For In Starbucks’ Q4 2017 Results

Starbucks (NASDAQ: SBUX) will report its Q4 and fiscal year 2017 results on November 2nd 2017 and expectations from this quarter are not very high given that the company lowered its EPS guidance based on its Q3 2017 results. ...More

Here’s Why Innovation Is Likely To Be The Key Growth Driver For Restaurants

As the millennial generation reaches its prime spending years, companies are increasingly adapting themselves to the preferences of this generation. A Goldman Sachs report on millennials states that this generation is focused on “eating right and healthy” and smartly uses online information to track the healthiest food. ...More

Here’s Why Starbucks Is Not Expanding Aggressively In India

Starbucks' (NYSE:SBUX)’ stock price is down nearly 20% since June this year amidst investor concerns on growth, as congestion impacted the company’s comparable sales, and it lowered its profit guidance for the rest of the year. While growth slowed down in the U.S., international expansion remains a key growth driver for the company. ...More

Can Starbucks Be Threatened By Nestle’s Acquisition Of A Majority Stake In Blue Bottle?

Recently, Nestle announced that it had “acquired a majority stake in high end specialty coffee roaster and retailer Blue Bottle.” Blue Bottle is a boutique premium coffee chain with around 50 stores across the U.S. ...More

Here’s Why Starbucks Is Innovating Around Iced Drinks

Recently, Starbucks (NYSE:SBUX) unveiled “Cold Pressed Espresso” a new cold extraction process which will become the base of the company’s iced beverages. ...More

Here’s Why Starbucks Is Closing Its Online Merchandise Store

Reports suggest that Starbucks (NYSE:SBUX) is shutting down its online store which sells merchandise such as mugs, coffee brewers, etc., in what appears to be an attempt to attract traffic to its physical stores. In Q3 2017, while the company reported growth in comparable sales, it was due to an increase in ticket size and guest count remained flat. ...More

Can Innovative Menu Items Drive Food Revenue Growth For Starbucks?

Starbucks (NYSE:SBUX) had a disappointing Q3 2017 as the company missed consensus estimates for revenues and earnings per share (EPS) and lowered its EPS guidance for the full year.  While comparable sales in the U.S. grew by 5% in this quarter, this growth was due to an increase in ticket size while guest count remained flat. ...More

Is Starbucks Looking At A Rough Road Ahead?

For the past three quarters, Starbucks (NYSE:SBUX)is struggling to grow revenues in the U.S. While comparable sales growth slowed down in the first two quarters of this fiscal year due to a congestion caused by its mobile order and pay system, Q3 2017 showed strong growth but it was only due to an increase in ticket size. ...More

Starbucks Misses Estimates In Q3 2017, Lowers Full Year Guidance

After two straight quarters of slowing comparable sales growth in the U.S., Starbucks' (NYSE:SBUX) Q3 2017 results, which were announced on July 27th, were encouraging. While the company missed consensus estimates on earnings per share (EPS) – which stood at $ 0. ...More

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