Coffee giant Starbucks Corporation (SBUX - Analyst Report) delivered mixed fourth-quarter fiscal 2013 results, beating the Zacks Consensus Estimate for earnings but missing the same for revenues. However, Starbucks’ fiscal 2014 earnings outlook fell short of expectations, slightly lowering share price.
Starbucks’ adjusted earnings of 63 cents per share for the fourth quarter of fiscal 2013 beat the Zacks Consensus Estimate of 60 cents by 5.0%. Earnings grew 37% year over year and also beat management’s expectations (59 cents–60 cents), driven by decent sales growth and solid margin expansion.
As previously announced by the company, earnings included a combined 3 cents per share gain from sale of equity stakes in joint ventures in Argentina and Chile.
Revenues and Margins
Total sales for the fourth quarter increased 13% year over year to $3.80 billion, slightly missing the Zacks Consensus Estimate of $3.814 billion. Revenue growth was, however, at the higher end of management’s expectation of a range of 10%–13%. New store openings, strong comps in the U.S., traffic gains in Europe and improvement in Channel Development business drove the top line in the quarter.
Same-store sales, which exclude the impact of the company-operated stores opened in the past 13 months, grew 7%, driven by 5% increase in global traffic. Comps were in line with management’s projected 5%–7% range, also lower than the third quarter.
Adjusted operating margin increased 220 basis points (bps) to 17.6%, much higher than management’s expectation of an increase of 100 bps. Operating margin growth was driven by strong sales leverage, lower coffee costs and store portfolio optimization in Europe. Strong margin growth in all segments drove profits in the quarter.
Starbucks operates through the following segments: Americas (inclusive of the U.S., Canada and Latin America and also includes the La Boulange bakery business acquired in fiscal fourth-quarter 2012); Europe, Middle East and Africa (EMEA); China-Asia-Pacific (CAP); and Channel Development (CD); and All-Other. The CD segment is not a geographic region but an entirely different channel (referred to as CPG channel henceforth). It includes the U.S. Foodservice business and also sells whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages, Starbucks VIA Ready Brew, and Starbucks coffee and Tazo tea K-Cup packs. The All-Other segment comprises the emerging brands including Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution Fresh, Tazo Retail and Digital Ventures.
Americas: Net revenue in this flagship segment continued to be strong, rising 11% over the prior-year quarter to $2.78 billion, attributable to 8% growth in same-store sales. Growth in the U.S. was driven by higher seasonal beverage sales (especially pumpkin spice latte) and enhanced food offerings (especially La Boulange bakery items). Starbucks loyalty cards have become increasingly popular and are a major driver of consumer traffic in the U.S. Canada and Latin America also did well in the quarter.
We believe that the comps will continue to grow in the U.S. in fiscal 2014 driven by innovative beverages, enhanced food offerings, La Boulange's national expansion and Teavana tea introduction into stores.
Adjusted operating margin improved 100 bps to 21.8% in the quarter driven largely by strong sales leverage.
EMEA: Net revenue increased 3% year over year at $293.4 million in the quarter driven by improvement in comps. Comps grew 2% in the quarter, same as in the third quarter and much better than the declines witnessed in the preceding few quarters. Increased consumer traffic at the stores due to food/ beverage innovation and growth in the number of licensed stores drove comps in the quarter.
Adjusted operating margin increased 1170 bps to 9.3% in the quarter due to portfolio-mix shift toward licensed stores and solid cost control.
The company is trying to revive its business in Europe by pursuing increased higher-margin licensing opportunities, shutting down unprofitable stores, cutting general and administrative (G&A) expenses and implementing robust brand building initiatives. We believe these initiatives have started showing fruitful results leading to the improved performance in the second half of fiscal 2013.
CAP: Net revenue grew 29% to $255.7 million in the quarter driven by 8% increase in same-store sales and the rapid pace of store openings. In the quarter, the company opened its 1000th stores in both China and Japan.
Operating margin at the CAP segment improved 440 bps year over year to 37.5% in the quarter. Margins improved 130 bps sequentially; significantly surpassing management’s forecast of a sequential decline in the quarter. Increased operating leverage and lower operating costs drove the profits for this segment.
CPG: Net revenue grew 13% year over year to $360.9 million in the fourth quarter driven by strong performances of Starbucks/Tazo branded K-Cup portion packs and strong foodservice sales. Foodservice sales increased 13% while K-Cups increased 42% in the quarter.
In fact, packaged coffee showed some market share improvements gaining from the recent price reductions. Starbucks lowered the list price of its packaged coffee products in May in response to price reductions by almost all competitors.
Though fiscal 2013 was slower, CPG revenues are expected to accelerate in fiscal 2014 driven by volume growth from recent price reduction, innovation, international expansion and an accelerated agreement with partner Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report). Under the new five-year agreement, Starbucks has tripled the number of its products that it supplies to be run on Green Mountain’s Keurig brewers.
Adjusted operating margin increased 450 bps to 35.6% in the quarter driven by low coffee costs and sales leverage.
All-Other: Revenues in the segment grew to $105.5 million, more than doubling over the last year due to the inclusion of sales from Teavana retail stores which were absent in the last quarter. Growth in the digital ventures business and Evolution Fresh also contributed to the rise.
In fiscal 2013, total revenue increased 12% to $14.89 billion, missing the Zacks Consensus Estimate of $14.91 billion.
Adjusted earnings were $2.26 per share, which beat the Zacks Consensus Estimate of $2.23 as well as management’s expectations of $2.22–$2.23. Earnings increased 26% from the prior year. However, the earnings guidance includes a one-time gain of 6 cents per share from the sale of equity stakes in joint ventures in Mexico, Chile and Argentina.
Adjusted operating margin expanded 150 bps to a record 16.5% in fiscal 2013.
The board of directors of Starbucks approved a 24% increase in the company’s quarterly dividend to 26 cents per share.
Fiscal 2014 Outlook Falls Short
For fiscal 2014, the company expects revenues to grow 10% or higher, compared to prior expectation of 10%–13% growth. Comps are still expected to grow in the mid single-digit range. In addition to food/beverage innovations, loyalty program and single-serve products, we believe that La Boulange bakery items, Evolution juices and Teavana tea could emerge as meaningful top-line growth drivers in fiscal 2014.
Starbucks expects to open 1500 stores (previously 1400) in the year including 600 in America, 150 in EMEA and 750 in CAP.
Operating margin is still expected to expand approximately 150 bps–200 bps year over year driven by higher revenues and lower coffee costs. Adjusted earnings are expected to range between $2.55 and $2.65 per share (maintained), falling short of the Zacks Consensus Estimate of $2.67. Earnings are expected in the range of 67 cents–69 cents in the first quarter and 54 cents–55 cents in the second quarter.
Lower coffee costs are expected to benefit earnings in the range of 9 cents–10 cents per share in the year which will be partially offset by the pricing actions for packaged coffee. In addition, the company expects incremental interest expense (due to $750 million in additional long-term debt issued in September) and tax rate in the year compared to fiscal 2013. Tax rate is expected to be approximately 34.5% in the year, higher than 2013 levels.
Capital expenditures are expected to be approximately $1.2 billion, flat from 2013 levels.
Starbucks carries a Zacks Rank #2 (Buy). Other restaurateurs such as Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report) and Tim Hortons Inc. are currently doing well and have a bright outlook. Both the stocks carry a Zacks Rank #1 (Strong Buy).
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