Starbucks' Double-Digit Growth

Nov.29.12 | About: Starbucks Corporation (SBUX)

Starbucks (NASDAQ:SBUX) continues to intrigue investors by delivering impressive year-over-year results. The company, which at one point was plagued by over-expansion, has recouped and continues to move ahead. The management team in place deserves recognition for its ability to adapt to changing market environments and consumer tastes. As the recent quarter displayed, the company illustrated it has the ability to follow up weak quarters with new initiatives and ways to increase customer ticket sizes. The company is firing on all cylinders, fueling growth by increasing store count, growing comparable same store sales, and making strategic acquisitions. With not much movement in the stock price over the past six months, and just having reported a record fiscal year of earnings, investors may have an opportunity to acquire a quality company which is poised for further growth.

Starbucks takes on the image of an ordinary coffee company, but it is actually quite unique. Although some analysts may consider it a luxury goods company, Starbucks actually caters to all levels of consumers. Customers are very loyal and proof of this can be seen by the "Starbucks Card." Last fiscal year, a record $3 billion (25% of US store tender) was loaded onto customers cards, with just under $2 billion coming from "reloads" (existing customers adding more funds to their card). The company's use of social media, while difficult to evaluate directly, has undoubtedly driven sales. At any given month, Starbucks is a leading brand on Facebook (NASDAQ:FB) and Twitter. As a result of leveraging social media to promote the brand, traditional marketing costs are significantly reduced.

Starbucks has many components which contribute to overall growth; however, most don't make a significant impact in the company's bottom line. While debating about the future of recent acquisitions or the new Verismo system are worth considering in your evaluation of the company, I prefer to focus on the core business model in place. Throughout this article, I will highlight what I believe to be the major drivers of growth over the next few years along with my projections for fiscal year 2013 and 2014. It is worth noting that all my data is reported using GAAP results and a slightly modified income statement (which will be described in further detail below).

Store Growth and Comps

The company is well on its way to reach its corporate goal of 20,000 stores on six continents by 2014 (sorry Antarctica, you will still need to wait). As of fiscal year 2012, which ended on September 30th, the company operated or licensed 18,066 locations. The large majority of those locations are in the "Americas" segment (12,903), followed by "China Asia Pacific" (3,294), and "Europe Middle East Africa" (1,869). For fiscal year 2013, the company expects to open 1,300 stores globally; this is up from an estimate of 1,200 stores given last quarter. 600 of these new locations are expected to open in "CAP" region with more than half in mainland China.

CEO Howard Shultz told investors on the company's recent earnings call that Starbucks is on track to reach its near-term goal of having 1,500 locations in China by 2015, soon becoming the largest market outside of the United States. While many analysts are worried of a slowdown in China, management sees another story playing out. The rapidly growing middle class in China continues to spend; this is evidenced by a 52% year-over-year increase in revenue from this region coupled with double-digit same store sales. China is likely to be a major contributor behind the company's growth in the years ahead.

Comparable same store sales continue to drive revenue from both average transaction and average ticket sizes. Consolidated same store sales rose 7% last year and continue to remain robust following the worldwide recession of 2008-2009. I mentioned the incredible opportunity in China; in the table below, you can see the year over year growth in same store sales in CAP. The Americas which make up the largest portion of revenue continue to be strong as well. EMEA (Europe) saw no change in same store sales last year; however, given the current state of many economies in this geographic region, no growth is better than negative growth. Michelle Goss, president of the EMEA division expressed in the recent earnings call that operating margins are expected to improve moving forward. Given the company's impressive rebound from the 2008-2009 US recession, I believe it appears well equipped to handle the challenges that lie ahead in this region. In my opinion, any positive results from the EMEA region would provide a boost to sales.

Consolidated

Americas

CAP

EMEA

FY 09

-6%

-6%

2%

-3%

FY 10

7%

7%

11%

5%

FY 11

8%

8%

22%

3%

FY 12

7%

8%

15%

0%

Click to enlarge

Source: Starbucks SEC Filings

Fiscal Year Projections

CFO Troy Alstead gave analysts new projections for fiscal year 2013 which were slightly higher than he reported three months prior. To highlight a few, revenue is expected to grow 10-13%, capital expenditures will be near $1.2 billion and operating margins are expected to improve by approximately 100 basis points. Full year diluted earnings per share are expected to be $2.06 - $2.15, representing 15-20% growth year over year.

In the table below, I have provided Starbucks' fiscal 2012 full year results, and my projections for fiscal year 2013 and 2014. Below are a few points I factor into my analysis:

  • Although not listed in the table below, the company includes "restructuring charges" and "property sale gains" as operating income/expense. I disagree with this treatment of specific line items, and if any are to occur in 2013 or 2014, my models will be updated to include those below the line item "operating income."
  • The company recently authorized a share repurchase program of up to 25 million shares in addition to the 12.1 million already available for repurchase (bringing the grand total to 37.1 million shares). I anticipate no substantial increase in the share count as a result of this new plan.
  • My estimates for expenses may be slightly altered following the company's "Biennial Investor Conference" held in early December. More clarity for operating expenses in the current fiscal year will likely be given during this conference.
  • Margin improvement comes from various sources; however, reduced coffee costs in FY13 and possibly into FY14 could give a substantial boost to gross, operating, and net profit margins.

2012

2013

2014

Full Year

CS

YOY Growth

Full Year Estimate

CS

YOY Growth

Full Year Estimate

CS

YOY Growth

Revenue

$13,299,500,000

100.00%

13.67%

$14,895,440,000

100.00%

12.00%

16,645,654,200

100.00%

11.75%

Cost of Revenue

$5,813,300,000

43.71%

18.26%

$6,516,755,000

43.75%

12.10%

7,290,796,540

43.80%

11.88%

Gross Profit

$7,486,200,000

56.29%

10.34%

$8,378,685,000

56.25%

11.92%

9,354,857,660

56.20%

11.65%

Store Operating Expenses

$3,918,100,000

29.46%

8.99%

$4,319,677,600

29.00%

10.25%

4,702,397,312

28.25%

8.86%

Other Operating Expenses

$429,900,000

3.23%

9.45%

$484,101,800

3.25%

12.61%

532,660,934

3.20%

10.03%

Depreciation and Amor. Exp

$550,300,000

4.14%

5.16%

$580,000,000

3.89%

5.40%

615,000,000

3.69%

6.03%

General and Admin Exp

$801,200,000

6.02%

6.93%

$856,487,800

5.75%

6.90%

965,447,944

5.80%

12.72%

Income from equity investees

$210,700,000

1.58%

21.30%

$248,626,000

1.67%

18.00%

293,378,680

1.76%

18.00%

Operating Income

$1,997,400,000

15.02%

17.61%

$2,387,043,800

16.03%

19.51%

2,832,730,151

17.02%

18.67%

Interest income and Other, net

$94,400,000

0.71%

-18.55%

$119,163,520

0.80%

26.23%

149,810,888

0.90%

25.72%

Interest Expense

-$32,700,000

-0.25%

-1.80%

-$32,700,000

-0.22%

0.00%

-32,700,000

-0.20%

0.00%

Pretax Income

$2,059,100,000

15.48%

13.69%

$2,473,507,320

16.61%

20.13%

2,949,841,039

17.72%

19.26%

Provision for income taxes

$674,400,000

5.07%

19.77%

$816,257,416

5.48%

21.03%

973,447,543

5.85%

19.26%

Net earnings

$1,384,700,000

10.41%

10.95%

$1,657,249,904

11.13%

19.68%

1,976,393,496

11.87%

19.26%

Net earnings (loss) non controlling interests

$900,000

0.01%

-60.87%

$1,000,000

0.01%

11.11%

1,000,000

0.01%

0.00%

Net Earnings Total

$1,383,800,000

10.40%

11.09%

$1,656,249,904

11.12%

19.69%

1,975,393,496

11.87%

19.27%

Basic Shares Outstanding

754,400,000

755,000,000

755,000,000

Basic EPS

$1.83

$2.19

$2.62

Diluted Shares Outstanding

773,000,000

775,000,000

775,000,000

Diluted EPS

$1.79

$2.14

$2.55

Click to enlarge

Source: My projections and Starbucks SEC Filings

Starbucks has rarely surprised investors to the upside or downside when earnings are released. If anything the company typically errors on the side of caution and increases guidance as more clarity is revealed. While past performance is no guarantee of future results, the market does like clarity, and management is well aware of this. That being said, 29 of the top analysts that cover Starbucks are anticipating 2013 fiscal year diluted EPS of $2.08-$2.25, with 21 analysts revising their estimates upward following the Q4 earnings release. My estimate of $2.14 per diluted share is towards the lower end of these estimates. For fiscal year 2014, the analyst estimates range from $2.52-$2.82 with 13 analysts revising their estimates upward in the past month. Again, my projection falls towards the lower end of this range.

Valuation

Shares of SBUX currently trade at just under 29x trailing twelve month earnings. Assuming the company can continue to grow same store sales in the high-mid single digit range, improve operating margins, and grow EPS in the 15-20% range management projects, a high multiple is likely warranted. Assuming my projections above lean towards the conservative side, and the stock trades at 27x TTM earnings in FY13 and 26X TTM earnings in FY14:

  • End of Fiscal year 2013 value = $2.14 diluted EPS X 27x P/E ratio = $57.78 per share, roughly 14% from current levels
  • End of Fiscal year 2014 value = $2.55 diluted EPS X 26x P/E ratio = $66.3 per share, roughly 31% from current levels, 14.41% CAGR

The chart below shows the stock's quarterly trailing twelve month price-to-earnings ratio. Although still at lofty levels, until the company begins to show signs of slowing down, it is likely this ratio will remain elevated.

Click to enlarge

Source: Starbucks SEC Filings

Note that my projections above do not factor in the current cash dividend of $0.21 per share. While no dividend increases are guaranteed, I anticipate this rate to be bumped up to $0.25 per share around the same time next year.

Conclusion

While shares of Starbucks are by no means a risk free investment, nor are any of the returns I mentioned above guaranteed, I believe this company has room to grow and offers value at current price levels. Starbucks faces many risks including but not limited to: slowdowns in consumer spending, over expansion, fluctuating commodity prices and increased competition from McDonald's (NYSE:MCD), Green Mountain Coffee Roasters (NASDAQ:GMCR) and Dunkin' Brands (NASDAQ:DNKN).

Consider your investment goals and objectives before initiating a position in Starbucks. If you see a fit in your portfolio, I think being a long-term shareholder will provide attractive returns. In my opinion, the growth story of this company remains intact.

Note: All data reported and graphed is pulled directly from Starbucks SEC filings and press releases.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.