Starbucks - Momentum In America Continues To Push Shares Higher

| About: Starbucks Corporation (SBUX)

Shares of Starbucks (NASDAQ:SBUX) continue to trade at their highest level for the year as strong momentum has already resulted in year to date returns of about 50%.

Starbucks continues to be upbeat for the prospects of the firm, although the guidance for 2014 is a bit more cautious than anticipated by analysts.

I remain on the sidelines on the back of valuation concerns.

Fourth Quarter Results

Starbucks generated third quarter revenues of $3.79 billion, up 12.8% on the year before.

Operating earnings advanced by 28.7% to $668.9 million, as net earnings rose by 34.0% to $481.1 million. Diluted earnings per share rose even quicker, increasing by 37.0% to $0.63 per share, beating consensus estimates by three cents per share.

CEO and Chairman Howard Schultz commented on the fourth quarter performance, "The fourth quarter of fiscal 2013 capped off by far the best year in Starbucks 42-year-history. Our results were driven by disciplined, ongoing efforts to elevate the value and relevance of the Starbucks brand, continued innovation and the success of our efforts to deepen our connection to customers and communities around the world."

Looking Into The Results

Revenue growth was driven both through store openings as well as by continued strong comparable store sales growth. Comparable store sales growth came in at 7%, beating consensus estimates at 6.7%. Growth was mostly driven through a 5% increase in traffic. On top of that, Starbucks opened some 558 stores during the quarter.

Starbucks opened net 340 stores in the Americas as revenues were up by 11% to $2.78 billion. Operating earnings rose by 16% to $605.9 million, as operating margins rose by 100 basis points to 21.8% of total revenues, on the back of positive sales leverage.

The company opened 28 stores in Europe, Middle-East and Africa. Revenues rose by 3% to $293.4 million as the company turned an operating loss into profits of $27.3 million. Operating margins improved by 11.7% to 9.3% of total revenues on the back of portfolio optimization activities, started last year.

Starbucks opened 197 stores in China and the wider Asia-Pacific region, as revenues rose by 29% to $255.7 million. Operating earnings rose by 46% to $96 million as margins saw another 440 basis points increase to 37.5% of total revenues.

Channel development revenues rose by 13% to $360.9 million as operating earnings rose by 30% to $128.4 million. Lower coffee costs and operating leverage boosted earnings by 450 basis points to 35.6% of total revenues.

All other segments more than doubled their revenues to $105.5 million, as operating losses nearly doubled to $16.5 million. Revenue growth was driven by the acquisition of Teavana.

Looking Into 2014

For the coming year, Starbucks anticipates revenue growth of at least 10%. Growth should be driven by comparable sales growth in the mid single digits. Some 1,500 net new store openings are anticipated of which 750 in China and Asia-Pacific, 600 in the Americas and 150 in Europe, Middle-East and Africa.

On top of this, Starbucks anticipates 150 to 200 basis points improvements in operating margins.

All this translates into earnings of $2.55 to $2.65 per share for next year, missing consensus estimates at $2.67 per share. Also note that Starbucks previously guided for revenue growth of 10-13%, which is now adjusted to growth of at least 10%.


Starbucks ended the fourth quarter with $3.23 billion in cash, equivalents and short term investments. Total debt stands at $1.30 billion, for a net cash position of $1.93 billion.

Revenues for the year came in at $14.89 billion, up 12.0% on the year before. Net earnings rose by 24.4% to $1.72 billion.

Trading around $81 per share, the market values Starbucks at $61 billion. This values operating assets of the firm at around $59 billion. As such, equity in the firm is valued at 4.0 times annual revenues and 34 times annual earnings.

Starbucks currently pays a quarterly dividend of $0.26 per share, for an annual dividend yield of 1.3%.

Some Historical Perspective

Investors have been applauding the return of Howard Schultz to Starbucks. After shares peaked at $40 back in 2006 they fell to lows of $10 in 2008 on the back of the recession and poor management.

Shares have gradually risen to highs of $80 per share at the moment, after shares have already risen by some 50% this year. Between the fiscal year of 2010 and 2013, Starbucks has grown its annual revenues by a cumulative 39% to $14.9 billion. Earnings rose by some 82% to $1.72 billion.

Looking Beyond Coffee

Besides growing rapidly in coffee, Starbucks is aiming to diversify. Note that the company has focused store openings in the Asia-Pacific region, but Starbucks aims to serve other drinks and pastries as well.

To achieve this, Starbucks already announced the acquisition of Teavana late last year for $620 million. Besides selling tea in Teavana's 300 stores, Starbucks is now able to sell tea on the side in its coffee shops. Starbucks aims to achieve similar same store sales growth by offering pastries from the acquisition of the La Boulange chain into is own stores.

On top of this, Starbucks has also expanded into energy drinks, juice, single-serve brewer and even yoghurt through partnering with Danone. Note that yoghurts will be distributed under the "Evolution Fresh" brand, to be available early next year.

Investment Thesis

Starbucks continues to perform really well, and notably the strong performance in the Americas is noteworthy. The US business reported 8% comparable growth, and is still really important as it generates three quarters of total revenues.

Yet expectations were sky-high into the report, notably for next year's earnings, as Starbucks earnings guidance missed versus consensus estimates. An offsetting factor is the fact that Starbucks upped its target store openings by a 100 stores to 1,500 new locations for next year, while raising the quarterly dividend by five cents to $0.26 per share.

All of this will translate into revenues of at least $16.5 billion next year, while earnings should come in around $2 billion.

Back in July of this year, when Starbucks reported its second quarter results, I last took a look at the prospects for Starbucks. At the time, the stock was trading around $73 per share, as the stock was hot on Wall Street, just like the coffee being served.

For now, Starbucks continues to show rapid growth as it looks to diversify away from the Americas, by boosting growth in Asia. At the same time, notably the Teavana and La Boulange acquisitions are aimed to reduce the reliance on coffee sales.

As shares have risen another 10% over the past quarter, I remain cautious and stay on the sidelines on valuation concerns. The price-earnings ratio of 29-30 for next year is a bit too steep. While margins are still set to expand in 2014, I remain cautious on the limited possibilities for margins expansion in the year's thereafter.

I remain on the sidelines, but congratulate management and shareholders on an excellent past quarter.

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.