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Starbucks Remains Neutral

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On Sep 6, we maintained a Neutral recommendation on Starbucks Corporation (SBUX - Free Report) , despite solid fiscal-third quarter 2013 results as we await a rebound in the European and CPG businesses.

Why the Reiteration?

The coffee giant’s fiscal-third quarter 2013 earnings of 55 cents per share beat the Zacks Consensus Estimate of 53 cents by 3.8%. Earnings grew 28% year over year and also beat management’s expectations. Robust increase in global traffic, increasing popularity of its Starbucks loyalty cards, efficiency improvements and cost controls and lower coffee costs boosted profits.

Revenues increased 13% year over year and also beat the Zacks Consensus Estimate. Strong comps in the U.S. and Asia-Pacific and significant improvement in Europe drove the top line in the quarter.

Moreover, the company raised earnings expectations for the fourth quarter and fiscal year 2013 and also issued an impressive guidance for fiscal 2014.

Overall, we are encouraged by Starbucks’ strong global retail footprint, successful food/beverage innovations, rapid growth in international markets and solid turnaround in the U.S. We believe that the company has compelling growth drivers like La Boulange, Verismo, Teavana, K-Cups, loyalty program and food innovations to sustain the earnings momentum, going forward.

Following the solid third-quarter results and the upbeat outlook for the year, estimates were largely revised upwards. The Zacks Consensus Estimate for 2013 increased 1.4% and that for 2014 went up 1.5% over the last 60 days.

However, Starbucks is facing challenges in its European business due to the region’s poor economic conditions, high unemployment and fragile consumer confidence. Though the transformational initiatives are gaining traction, we would prefer to remain on the sidelines until we witness some significant improvement. Further, revenues from the company’s CPG business slowed down in fiscal 2012 due to stiff competition in the packaged coffee market resulting in lowered pricing.

CPG revenues are expected to return to double-digit growth in fiscal 2014 driven by volume growth from recent price reduction, innovation, international expansion and an accelerated agreement with partner Green Mountain Coffee Roaster, Inc. . Until we see substantial improvement in Europe and the CPG business rebounds, we prefer to be on the sidelines.

Other Stocks to Consider

Starbucks carries a Zacks Rank #3 (Hold). Other restaurateurs such as Burger King Worldwide, Inc. and Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) are currently doing well and have a bright outlook. All these stocks carry a Zacks Rank #2 (Buy).

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