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Starbucks (SBUX) Beats Q4 Earnings, Hikes Dividend by 25%

YUM CMG SBUX LOCO

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Shares of Starbucks Corporation (SBUX - Free Report) rallied almost 1.41% in after-hours trading following record fourth quarter and fiscal 2016 financial and operating results. Apart from registering solid results, the premium coffee chain declared a 25% increase in dividend, reaching its quarterly dividend to 25 cents share.

Earnings Beat

Adjusted EPS of 56 cents surpassed the Zacks Consensus Estimate of 55 cents and was also ahead of management’s projected range of 54–55 cents. Earnings also improved 30.2% year over year. Meanwhile, fiscal 2016 EPS jumped 20.9% to $1.91 per share.

Sales & Comps

Total fourth-quarter sales of $5,71 billion increased 16% year over year. Revenues also beat the Zacks Consensus Estimate of $5.68 billion by 0.5%. Higher sales in the U.S. and China/Asia Pacific segment have counterbalanced a slowdown in the Europe, Middle East, and Africa (“EMEA”) segment.

Same-store sales (comps) grew 4%, same as the previous quarter, due to cooling global traffic trends. Global traffic decreased 1% in the quarter, worse than flat growth registered in the previous quarter. Average ticket growth was 6%, higher than the 4% increase in the previous quarter.

Sales also climbed 11.2% to $21.3 billion in fiscal 2016. Comps increased 5% in the fiscal, with 6% sales growth in the U.S. and a 3% in the China/Asia Pacific segment.

Margins Jumps

Operating margin showed a significant jump of 180 basis points (bps) year over year to 21.5% in the quarter as improved sales leverage, the one extra week in the quarter and lower commodity costs, mainly coffee, offset higher employee and digital investments, mainly in the Americas segment.

Segment Details

Americas: Net revenue in this flagship segment rose 17% year over year to $3.97 billion.

Comps rose 5% in the quarter, more than 4% last quarter. The company’s U.S. business delivered record revenues, up 18% year over year. The U.S. comps accelerated from the third quarter and posted 4% growth that includes 6% rise in tickets and 1% decline in transactions. This is due to the shift in customer preference from order splitting to order consolidation.

Food sales grew 17% year over year and contributed 1 point to comps growth in the quarter. Breakfast sandwiches continued to do well.

Core beverages platform accounted for 2% of comp growth as beverage innovation drove another point of comp, with Coconut Milk Macchiato, Latte Macchiato, Vanilla Sweet Cream Cold Brew and Teavana Iced Berry Sangria.

Notably, despite the change to the rewards program, Starbucks’ membership was up 18% year over year in the My Starbucks Rewards (MSR) program in the quarter. Customers in the U.S. are using the chain’s mobile app to order and pay for their drinks and are joining the company’s rewards program. Mobile payments represented 25% of U.S. transactions, up from 20% a year ago.

Operating margin surged 280 bps to 27.6% as strong sales leverage, one extra week and lower costs of sales were offset by higher investments.

Europe, Middle East and Africa (EMEA): Net revenue declined 12% year over year to $270.2 million due to portfolio shift to licensed stores including the sale of the Germany outlet.

Comps declined 1%, same as the last quarter due to a slowing economy, Brexit-related political uncertainty and recent terror attacks in the region.

Operating margin declined 20 bps to 17% mainly due to unfavorable foreign currency exchange and sales deleverage in certain company-operated stores.

China-Asia-Pacific (CAP): Net revenue rose 29% to $839.2 million on the back of higher revenues from new store openings, the impact of the 53rd week and favorable foreign currency translation.

Comps grew 1%, softer than 3% growth seen in the previous quarter as strength in China was offset by softer comps in Japan, impacted by the ongoing consumer and economic challenges.

China comps rose 6% in the country, evenly split between increases in traffic and ticket. Starbucks intends to more than double its store count in the world’s second-biggest economy to 5,000 by 2021.

Operating margin at the CAP segment rose 300 bps year over year to 22.9% as strong sales leverage, one extra week and higher JV income counteracted currency headwinds.

Channel Development (CPG): This segment includes roasted whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages (like Frappuccino and Starbucks Refreshers) and Starbucks and Tazo branded K-Cup packs sold through channels such as grocery, specialty retailers, and foodservice, to name a few.

Channel Development’s net revenue grew 14% year over year to $518.5 million on the back of share gains in at-home coffee.

Operating margin rose 390 bps to 47.1% driven by higher profits from the North American Coffee Partnership (NCAP) with PepsiCo, Inc, (PEP) and lower coffee costs.

All-Other: The segment comprises emerging brands like Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution Fresh and Digital Ventures. Revenues at the segment increased 1% to $115.2 million.

Fiscal 2017 Outlook

For fiscal 2017, the company expects non GAAP earnings in the range of $2.12–$2.14 per share.

Starbucks expects revenues to grow in the double digits with mid-single digit comparable store sales growth globally.

Starbucks carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Peer Releases

El Pollo Loco’s (LOCO - Free Report) third-quarter adjusted earnings of 18 cents per share missed the Zacks Consensus Estimate of 19 cents by 5.6%. However, earnings were flat on a year-over-year basis.

Yum! Brands, Inc. (YUM - Free Report) reported third-quarter 2016 earnings of $1.09 per share, in line with the Zacks Consensus Estimate. Further, earnings increased 9% year over year on lower share count.

Chipotle Mexican Grill, Inc.’s (CMG - Free Report) adjusted earnings of 79 cents per share missed the Zacks Consensus Estimate of $1.58 by 50%. Earnings also decreased considerably from the year-ago quarter figure of $4.59 due to a substantial decline in revenues.

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