Starbucks Q2 2013 Record Setting Report Recap

Apr.26.13 | About: Starbucks Corporation (SBUX)

Shares of Starbucks (NASDAQ:SBUX) were down after hours as investors were likely in the mood to take profits as the stock steadily climbed its way higher leading into the earnings release and through much of the quarter. For the quarter ended March 31, Starbucks said profit rose 26% to $390.4 million, or 51 cents a share. Analysts had expected 48 cents. Revenue rose 11% to $3.6 billion, while same-store sales grew 6%. Operating margins climbed to 15.3% from 13.5%. For its September 2013 fiscal year, Starbucks said it would earn between $2.12 and $2.18 a share. Its old forecast was $2.06 to $2.15 a share. However, Starbucks maintained its outlook for margin improvement, revenue and same-store sales growth.

The Americas segment revenue grew 10%, operating income grew 22% to $550 million. The company delivered strong flow through on sales growth with margins in the Americas growing by 220 basis points to 21.1% in the second quarter. That is the highest Q2 margin Starbucks has ever reported in the Americas segment of its business. During the quarter, the company managed to grow same-store-sales above 5% for the 13th consecutive quarter although the rate of growth did slow by 1% on a YOY basis. Additionally, the rate of revenue growth slowed by 4% YOY.

Starbucks' CEO Howard Shultz outlined on the earnings conference call to investors and analysts, the company's expansion efforts and growth strategy as follows:

  • The company plans to add approximately 3,000 new stores in the Americas over the next five years with at least 1,500 being in the U.S. and are now on track to open over 300 new stores and to renovate 14 other stores in the U.S. this year alone.
  • The company has plans to have a total of 4,000 stores in the China and Asia-Pacific region by the end of 2013, including more than 1,000 stores in Mainland China and more than 500 stores in South Korea.
  • The company will establish China as Starbucks single largest market outside of the U.S. in 2014 and have more than 1,500 stores by 2015.
  • The company has plans to open 100 new stores in Indonesia in the next three years and another 100 stores in the Philippines over the next four.
  • During Q2 2013, Starbucks opened its first store in Vietnam and has plans to continue store openings moving forward.
  • Starbucks is actively expanding the new U.K. franchise program with a number of experienced and well capitalized regional and national franchise operators as well as growing captive licensed store footprint into important customer segments such as rail stations, airports, universities and hospitals.
  • In Mexico, Starbucks has plans to open 250 new stores over the next five years.
  • New store growth in the U.S. will come alongside drive-through sales as the company looks to increase drive-through locations.

When it comes to Starbucks, the verdict is in; the company's growth for the foreseeable future remains intact as its global brand dominance in the premium coffee segment resonates with the consumer in a big way. From the U.S. to China, the company continues to add to its coffee house cache brand by adding stores and customers on a daily basis. The company's rewards program has gone a long way toward helping it achieve the success it has enjoyed over the last couple of quarters.

Product development and innovation continue to be at the forefront of making Starbucks what it has become today. The Verismo, launched in the second half of 2012, has not gotten off to the start investors would have liked to see, but as minute portion of the company's overall business and in a relatively new category for the company, the at-home small appliance category, sales will likely continue to climb over the coming quarters. The goal is to obviously continue to grow the Verismo installed user base. The single-cup flavored coffee and teas category is littered with competition at the low and high end of the pricing spectrum. Green Mountain Coffee Roasters (NASDAQ:GMCR) continues its North American dominance, but Starbucks, through its global storefronts has the ability to curtail Green Mountain's foray into international markets which the company has plans in place to initiate over the coming years. Starbucks is gearing up for a robust fall and holiday by further extending Verismo distribution to include additional specialty retailers and expand the Verismo portfolio to include both machine and pod innovations including tea.

Teavanna was purchased by Starbucks in Q4 of 2012 and the company plans on building the business further by adding additional mall stores in fiscal 2013 and to add a complete line of handcrafted beverages to the Teavana menu over time. Starbucks also expanded Starbucks loyalty program to include Teavana purchases giving Starbucks customers the convenience and benefit of using their Starbucks card and mobile app to pay for purchases in Teavana retail stores.

We can't forget Evolution Fresh which was acquired by Starbucks in November of 2011. Evolution Fresh Cold-Pressed Juice platform continues to grow nicely and there is now more than 4000 Starbucks stores and other retail locations including 300 Starbucks stores in the New York and Boston markets. The company is working to increase production and capacity to meet consumer demand and plans to have Evolution Fresh juices available in approximately 8,000 U.S. locations by the end of 2013.

The My Starbucks loyalty card program continues to grow. Starbucks says that they are adding approximately 80,000 new My Starbucks Rewards customers each week and expect to double the number of active members enrolled in Starbucks Rewards program from 4.5 million at the end of fiscal 2012 to 9 million in 2013. In May, the company has plans to roll out the rewards program to include purchases of Starbucks packaged products in the grocery channel.

As we steer away from the business and focus on the stock, Starbucks repurchased approximately 3 million shares of stock during the second quarter. This leaves approximately 26 million shares authorized as available for repurchase. The combination of these repurchases along with the $0.21 per share dividend resulted in $309 million return to shareholders in the second quarter and brings our first half of fiscal 2013 total to more than $850 million.

Let's look now at the company's newly issued guidance:

  • Full year earnings per share target to a range of $2.12 to $2.18.
  • Q3 2013: EPS in the range of $0.50 to $0.53.
  • Q4 2013: EPS in the range of $0.54 to $0.57.
  • Addition of 1,600 stores globally, reflecting the previously targeted 1,300 Starbucks stores in addition to 350 Teavana stores that were acquired or will open this year.
  • FY13 Capex of $1.2 billion.

While the company continues to struggle somewhat in the EMEA region, the growth in the Americas and other regions of the world seemingly buffer the results out of the struggling region. With expansionary plans in place and a strong management team known for its sound execution, the pullback in shares of SBUX may represent a buying opportunity for investors. In the coming days, GMCR will report its Q2 2013 earnings results. It will be interesting to see how the single-cup premium coffee provider fares in light of the earnings issued by Starbucks.

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.