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Starbucks Meets Earnings, Misses Sales

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Starbucks Corporation’s (SBUX - Free Report) adjusted earnings of 48 cents per share for the second quarter of fiscal 2013 were in line with the Zacks Consensus Estimate. Earnings of this coffee giant grew 20% year over year driven by solid margin growth.

However, the coffee giant failed to meet our revenue expectations. Moreover, though the company increased its earnings expectations for fiscal 2013, it did not change its sales outlook — signaling a lack of real growth.

Adjusted earnings excluded a one-time gain from sale of minority equity stake in a joint venture in Mexico.

Revenues and Margins

Total sales for the second quarter increased 11% year over year to $3.56 billion but slightly missed the Zacks Consensus Estimate of $3.59 billion. Beverage and food innovations and steady sales growth in the U.S. and Asia were partially offset by weakness in Europe.

Same store sales, which exclude the impact of new company-operated stores opened in the past 13 months, grew 6%, same as in the first quarter.

Adjusted operating margin increased 180 basis points (bps) to 15.3% driven by strong sales leverage and lower coffee costs. Cost controls and improved efficiency in the retail stores also boosted margins.

Segment Details

Starbucks operates through the following segments: Americas (inclusive of the U.S., 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 Teavana, Seattle's Best Coffee, Evolution Fresh, Tazo Retail stores and Digital Ventures business.

Americas: Net revenue in this flagship segment rose 10% over the prior-year quarter to $2.60 billion, attributable to 6% growth in same-store sales. In Americas, the U.S. did significantly well despite the cautious consumer spending environment, with comps up a strong 7% in the quarter.

Growth in the U.S. was driven by new product launches like Vanilla Spice Latte and Hazelnut Macchiato and enhanced and expanded food offerings. Starbucks loyalty cards have become increasingly popular and are a major driver of consumer traffic in the U.S. Latin America also delivered double-digit revenue growth in the quarter, driven by the growth in Brazil and Mexico.

Adjusted operating margin improved 220 bps to 21.1% in the quarter driven by strong sales leverage, improved productivity and cost controls and lower coffee prices.

EMEA: Net revenue was flat year over year at $273.2 million in the quarter as a 41% improvement in licensed store revenues were offset by a 6% decline in company operated revenues due to some closings and ownership changes in these stores. Same store sales declined 2% in the quarter due to continued economic weakness and constrained consumer spending in the region.

Despite the revenue shortfall, adjusted operating margin increased 450 bps to 1.9% in the quarter due to portfolio-mix shift towards licensed stores and solid cost control.

CAP: Net revenue jumped 22% to $213.6 million in the quarter driven by 8% increase in same-store sales and the rapid pace of new store openings. Increasing popularity of Starbucks’ loyalty cards and programs and increased sales of seasonal beverages also drove 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 and have more than 1500 stores by 2015.

Operating margin at the CAP segment declined 710 bps year over year to 32.0% in the quarter despite the solid sales growth due to higher investment spending to support the fast pace of growth in China. Moreover, shift in its store mix from licensed stores to lower-margin company operated stores also hurt operating margins. Also, the prior-year quarter included a one-time gain which was not present in this quarter.

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 grew 7% year over year to $343.5 million in the second quarter due to strong performance of Starbucks branded K-Cup portion packs.

However, revenue growth in the CPG segment has slowed down in this fiscal year as the company is investing in innovation and effective distribution of its long term growth drivers including the Verismo at-home-coffee machine, VIA Ready Brew, K-Cup portion packs, Refreshers energy drinks and iced coffee and tea.  Moreover, sales of roast and ground coffee declined 3.5% in core retail channels due to competitive pricing pressures.

Adjusted operating margin increased 270 bps to 27.4% in the quarter driven by low coffee costs.

Other: Revenues grew 131% in the quarter to $121.5 million due to inclusion of sales from the newly opened Teavana stores for the first time this quarter.

Fiscal 2013 Outlook Retained

The company upped its earnings guidance for 2013 but maintained its sales, comps and operating margin outlook. 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 and net new store openings. Starbucks now expects to open 1650 stores in the year, up from prior expectations of 1300 stores to include 350 new Teavana stores to be opened in the year.

Operating margin is expected to expand approximately 100 bps year over year, driven by better operating leverage. Earnings expectations were increased from a range of $2.06 — $2.15 to $2.12 — $2.18 (includes the second-quarter one-time gain from sale of minority equity stake in a joint venture in Mexico).

Starbucks expects to generate earnings per share of 50 cents – 53 cents in the third quarter, lower than Zacks Consensus Estimate of 54 cents. In the fourth quarter, the company expects earnings of 54 cents – 57 cents.

Starbucks carries a Zacks Rank #2 (Buy). The company 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 the earnings momentum in the upcoming quarters.

Other restaurateurs such as Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) , carrying a Zacks Rank #1 (Strong Buy), and Burger King Worldwide, Inc and Cheesecake Factory Inc. (CAKE - Free Report) , both carrying a Zacks Rank #2 (Buy) are currently doing well and are worth considering.

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