Global coffee shop powerhouse Starbucks (SBUX) posted strong third quarter results. Total revenue increased 13% year-over-year to $3.7 billion, roughly in-line with consensus estimates. Earnings per share jumped 28% year-over-year to $0.55, a few pennies above consensus expectations.
Increased store productivity continues to be the major driver behind Starbucks' fantastic revenue growth. Global same-store sales advanced 8% year-over-year on traffic that was 7% higher than that in the year-ago period. Same-store sales increased across all geographies, but the US was particularly strong, with comp growth of 9% year-over-year. Only a few years ago did the market wonder if Starbucks' premium coffee products were simply too expensive to keep consumers coming back. We think that critique has now been silenced. Overall, Starbucks' 'Americas' segment revenue jumped 12% year-over-year to $2.7 billion, with operating margins in the region advancing 220 basis points on a year-over-year basis, to 22.3% of sales. Most of the improvement came on the back of stronger gross margins as the price of coffee declined year-over-year.
Perhaps one of the primary drivers of the increase in business is the positive reception to Starbucks loyalty cards. 'Dollars loaded' jumped a staggering 30% year-over-year, and anecdotally, we are witnessing people actually spend more in order to achieve additional rewards. Though it may not seem like the most rational move for consumers, it appears to be working exceptionally well for Starbucks (at least for now).
On top of wonderful performance in the 'Americas' region, we were very pleased to see a 9% same-store sales growth rate in China/Asia-Pacific. Total revenue in the region surged 29% year-over-year to $234 million. CEO and founder Howard Schultz added some very bullish commentary on the region, saying on the conference call:
"…we're now on plan to surpass 4,000 stores in the region by the end of 2013. Noteworthy are that our strong 9% increase in China/Asia Pacific comps store sales improved in Q3 included 8% traffic growth, a doubling of our Q2 traffic growth. And that increased operating leverage enabled China/Asia Pacific to deliver some of the highest margins in the company. We will also open our 1,000(th) store in China by year end and remain on track for China to become Starbucks' largest market outside of the U.S. in 2014."
Although Valuentum is relatively bearish on the velocity of economic growth in China, we've seen Starbucks achieve fantastic same-store sales growth in the face of sluggish broader economic growth. Adding additional stores doesn't seem to be cannibalizing existing outlets very much either, suggesting that the Starbucks brand/experience is becoming even more popular in the burgeoning country.
In addition to strong operational results, Starbucks announced that it will issue $750 million in debt for general corporate activities. With roughly $1.7 billion in cash and equivalents at the end of the second quarter (the third quarter 10-Q has not been filed yet), Starbucks by no means needs to take on debt. However, with some predicting the end of the prevailing low-interest rate period, we think it makes sense for Starbucks to issue some inexpensive debt to put it in an even more flexible position in the coming years.
Looking at the fourth quarter, Starbucks expects to earn $0.59-$0.60 per share, a few cents better than that anticipated by the Street. 2014 guidance was even stronger as the firm forecasts revenue expansion of 10-13%, mid-single digit same-store sales growth, and earnings per share in the range of $2.55-$2.65, an increase of 18%-22% year-over-year.
After stagnating just a few years ago, Starbucks has recaptured its status as a growth company. Customers keep coming back and ordering more coffee and food, suggesting the firm is taking share from all competitors. Still, shares have run up dramatically, so we aren't interested in adding the name to the portfolio of our Best Ideas Newsletter at this time.