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U.S. Drives Solid 1Q for Starbucks

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Starbucks Corporation (SBUX - Free Report) reported earnings of 57 cents per share for the first quarter of 2013, in line with the Zacks Consensus Estimate. Earnings of this coffee giant grew 14% year over year, almost in line with management’s expectation of being at the lower end of its full year growth range of 15%–20%. Earnings growth was driven by solid top-line performance due to an outstanding holiday season in U.S.

Following the in-line first quarter results, the company maintained its previously provided outlook for 2013.

Revenues and Margins

Total sales for the first quarter increased 11% year over year to $3.8 billion.  The sales growth was driven by strong holiday performance in U.S, further expansion in China and Asia Pacific and continued momentum in the Channel Development segment. The quarterly revenues were slightly lower than the Zacks Consensus Estimate of $3.83 billion.

Same-store sales, which exclude the impact from new company-operated stores opened in the past 13 months, grew 6% benefiting from consumer traffic growth and solid holiday season sales. In the quarter, the company opened 212 net new stores all over the world, including the first three stores in the lucrative market of India.

Adjusted operating margin increased 40 basis points to 16.6%, as strong sales leverage and favorable commodity costs offset the headwinds from unusual cost pressures.

Segment Details

Starbucks operates through the following segments: Americas (inclusive of the US, Canada, and Latin America); Europe, Middle East, and Africa (EMEA); China-Asia-Pacific (CAP); Channel Development (CD); and Other. The CD segment is not a geographic region, but an entirely different channel (referred to as CPG channel henceforth). The CPG business reflects everything outside the Starbucks’s stores like packaged coffee, foodservice operations, K-Cups, Starbucks VIA Ready Brew and Tazo tea. The Other category includes Seattle's Best Coffee, Evolution Fresh and Digital Ventures.

Americas: Net revenue in this flagship segment rose 10% over the prior-year quarter to $2.85 billion, attributable to 7% growth in same-store sales. In Americas, U.S. did significantly well with revenues up 9% in the quarter driven by robust holiday activity due to a high volume of consumer traffic. A full lineup of holiday season offerings, like Starbucks' Christmas Blend Blonde Roast, and increased purchase of food items by customers helped capture more business during the holiday season.

The introduction of Verismo-at-home coffee machine in Sep/Oct 2012 added 0.5% to American comp growth in the quarter. In the quarter, Starbucks sold around 150,000 machines across all channels, a solid start for this key growth driver. The Verismo– at-home machine, together with the already popular VIA Ready Brew and K-Cup portion packs, is expected to significantly expand Starbucks’ presence in the fast growing premium single cup coffee segment.

Adjusted operating margin declined 50 bps to 20.8% in the quarter despite the revenue beat due to October global leadership conference costs, higher litigation charges, and the impact of Hurricane Sandy.

EMEA: Net revenue improved 1% year over year to $306.1 million in the quarter, driven by 41% growth in licensed store revenues and 27% growth in food service business which offset the 4% decline in company operated revenues due to some closings and ownership changes in these stores.

Adjusted operating margin increased 110 bps to 7.3% in the quarter due to revenue growth and solid cost control.

CAP: Net revenue jumped 28% to $214.1 million in the quarter driven by 11% increase in same-store sales and the rapid pace of new store openings. Increasing popularity of Starbucks loyalty cards and programs are also driving this segment’s revenues and profits. The company has increasingly focused on expanding its business in the fast growing Chinese market, which the company believes will become its second-largest market by 2014.

Operating margin at the CAP segment declined 60 bps year over year to 33.7% in the quarter despite the solid sales growth due to higher spending to support the fast pace of growth in China.

CPG: Starbucks’s CPG business is growing rapidly and is now the second largest unit at Starbucks to have grown three times faster than the company average. Net revenue surged 13% year over year to $379.8 million in the first quarter, fuelled largely by higher sales of Starbucks branded K-Cup portion packs. Continued growth in roasted ground coffee and the launch of Verismo at-home-coffee machine in CPG channels also boosted sales.

Adjusted operating margin increased 230 bps to 25.5% in the quarter despite the launching costs for Verismo driven by low coffee costs.

Overall, sales in all the segments were up sequentially.

Fiscal 2013 Outlook Retained

The company maintained its outlook for 2013. Overall, Starbucks has a bright outlook for fiscal 2013, expecting continued robust consolidated operating margin and earnings improvement in the upcoming year.

For fiscal 2013, the company continues to expect revenues to grow in the range of 10%–13% driven by mid-single-digit comparable store sales growth, net new store openings and strong growth in the Channel Development business.  Starbucks expects its recent new products like Verismo, light Blonde Roast coffee, K-Cups, La Boulange bakery products, Evolution Fresh juices and Refreshers energy drinks, to continue to boost sales.

Starbucks expects to open 1300 stores in the year, representing a 22% increase from fiscal 2012.

Operating margin is expected to expand approximately 100 bps year over year, driven by better operating leverage. The company expects slight operating margin improvement in Americas and EMEA against some decline in the CAP segment. CPG margins are expected to increase between 100 and 150 basis points.

Earnings are expected in the range of $2.06 to $2.15, representing growth of 15%–20%.

Starbucks has compelling growth drivers like La Boulange bakery products, Verismo at-home-coffee machine, Evolution Fresh juices, Teavana tea, and K-Cups portion packs to sustain earnings momentum in the upcoming quarters. Starbucks carries a Zacks Rank #3 (Hold).

Starbucks’ results came a day after peer, McDonald’s Corporation’s (MCD - Free Report) fourth quarter 2012 revenue and earnings, both beating the Zacks Consensus Estimates.

Other peer companies like Krispy Kreme Doughnuts, Inc. - Zacks Rank #1 (Strong Buy) and Burger King Worldwide, Inc are currently doing well and are worth considering.

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