Starbucks: More Than Just Coffee

| About: Starbucks Corporation (SBUX)

When it comes to discussing amazing coffee makers, Starbucks (NASDAQ:SBUX) needs no introduction. One can discuss a lot about what the company has to offer its shareholders. A strong dividend history, rising stock value, good consumer sentiments and increasing demand are just some of the perks of owning a share in this brewer. We will go through all these features throughout this article but before we begin let us examine Starbucks' performance during the last quarter of 2013.

Strong Performance Delivered

Total revenue of this quarter increased 13% to $3.8 billion with contributions from every segment of Starbucks. Store sales grew 7% and were globally driven by a 5% increase in the number of transactions commonly labeled as organic.

The consolidated operating income came was $669 million reflecting a 29% increase from the results of the corresponding quarter of the previous year. The operating margin expanded by 220 basis points to 17.6% and supported the 37% increase in EPS that grew to $0.63.

Let us now have a look at each segment's performance.

US Operations

Strength in beverage innovation, promotions, operational improvements and greater food offerings boosted the sales of this segment. Revenues grew by 11% to $2.8 billion. The operating margin expanded by 100 basis points to 22% which was driven by an 8% increase in comparable store sales and incremental revenue that came from the 680 new stores Starbucks opened in the last 12 months.

Operating income increased 16% to $605.9 million compared to $523.6 million during the same period a year ago.


Revenue grew by just 3% owing to the increase in store sales. The major drawback that held this segment back earlier was the closure of underperforming Starbucks stores. Starbucks is attempting to change its ownership structure and improve its operations through selling licensed stores in profitable regions.

Keeping that in mind, the operating margin increased by a whopping 12% from to 9.3% during this quarter. A part of this was due to the company's cost management and ongoing store portfolio optimization activities. With more licensed stores coming in the future we can expect this segment to grow further.

China/Asia Pacific

China is one country that is benefiting in every industry to a lesser or greater extent. Starbucks expects China will become its largest market outside the US. This is being proven by the strong demand as reflected in its quarterly results.

New store growth and strong performance from existing stores including joint venture operations in China and Japan created a 29% increase in revenues this quarter for this segment. The $255 million figure was the result of an 8% increase in comparable store sales.

Operating income grew 46% to $96 million and the operating margin expanded 440 basis points to 37.5%! These huge increases were driven by high demand, improved performance from joint venture operations and lower operation costs.

Channel Development

In simple terms this segment refers to the selling of packaged coffee in grocery and retail stores. This segment's sales grew by 13% owing to greater sales and a reduction in coffee costs.

The 13% increase in sales to $361 million was the result of greater sales in single serve products along with Starbucks and Tazo-branded K-Cup portion packs. The lower prices of packaged coffee did little harm to the rising revenues and instead boosted profits by 30% as coffee costs declined.

Looking forward, the segment already consists of 100,000 distribution points in over 20 countries and Starbucks intends to double that figure by 2015. Hence, we can expect some growth from this segment as well.

Margin Improvement to Come

Earlier I mentioned the increasing change towards licensed stores that Starbucks is implementing. One thing worth noting is that these stores provide greater profitability as they carry with themselves margins that are normally three or four times higher than company-operated stores. With greater demand coming from China and the company's intention to license more stores we can expect these stores to widen margins for Starbucks.

Additionally, the recent opening of the $70 million Evolution juice factory to cater to growing demand is also likely to increase profits. The $30 million Evolution brand that Starbucks bought 2 year ago is showing positive performance so Starbucks intend to run its previous factory along with the new counterpart to satisfy the increasing demand.

Evolution sold its 2,000 outlets last year and half are operated by Starbucks. Now, the juice is available in 8300 locations nationwide including Whole Foods branches. As told by Evolution's manager, "We're selling substantially more juice than we did a year ago." This brand also offers an increasing support to profitability.

2014 Outlook

Also, with the year-end, Starbucks posted its 2014 outlook bringing increasing confidence to our analysis. With capital expenditures expected at $1.2 billion next year Starbucks intends to add 1500 new stores with the greatest number in the Chinese region at 750 followed by 600 local openings. With this, revenue is expected to increase by a minimum of 10% with an increase in the company's operating margin of 150-200 basis points. China is expected to deliver the highest margin growth with expected figures in the low 30s. The overall EPS target set will be an increase of 15% increasing the range to $2.55-$2.65 from the 2013 period.

Starbucks Should be in Your Portfolio

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Source: Morningstar

All these factors give an overall convincing picture of Starbucks' ongoing success. The board announced that due to recent performance they were announcing a 24% increase in dividends this quarter. Add to that the increasing share value that Starbucks has recognized in the past 3 years. The company is no doubt a good buy for those who not only enjoy coffee but like to earn capital and dividend gains as well.

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.