Starbucks (SBUX) released its first quarter results on Thursday after the market close. The market hardly moved to what seems to be a bit of a soft quarter, despite continued growth.
Investors are not too worried, not penalizing the shares in after-hours trading as expectations for the quarter were not sky high. While the company's strategy is sound, and growth remains impressive, the valuation remains an issue for me.
First Quarter Highlights
Starbucks posted first quarter revenues of $4.24 billion, up 11.8% on the year before, but slightly missing consensus estimates at $4.29 billion. Store openings and a solid 5% increase in comparable store sales are the drivers behind top line growth.
Top line growth and margin expansion resulted in a 29.0% increase in operating earnings, coming in at $813.5 million. Operating margins were up by 260 basis points to 19.2% of total revenues.
Diluted GAAP earnings per share were up by 24.6% to $0.71 per share, beating consensus estimates by two pennies. Net earnings rose to $540.7 million in actual dollars for the quarter.
Looking Into The Quarter
The company aggressively opened its store base, opening 417 stores or nearly 5 stores every calendar day during the quarter. Note that the pace of store openings roughly doubled compared to 212 net openings in the year before.
Comparable store sales showed a healthy increase as well, driven by a 4% increase in the number of transactions and 1% higher prices. Comparable sales growth was 5% in both the Americas and Europe and the Middle East. Asia-Pacific revenues rose by 8% on a comparable base, driven by strong transaction numbers.
The US remains the driver of the results although the pace of growth is slowing down. Comparable store sales increases of 5% trailed consensus estimates at 6.4% as the impact of online shopping becomes more pronounced. Revenues in the Americas make up almost three quarters of total revenues.
Revenues rose by 8.2% to $3.07 billion. A 300 basis points margin improvement boosted operating income to 23.8% of revenues, resulting in operating income of $732 million. Sales leverage was achieved thanks to the impact of Sandy last year, top line revenue growth, lower coffee costs and a lack of litigation charges.
Starbucks stepped up in Europe and the Middle-East after a few difficult years. Revenues were up by 10.9% to $339.5 million. Top line growth boosted margins by 260 basis points to just 9.9% of revenues, leaving a big gap with the US operations. Note that the company is stepping up, opening 64 stores compared to just 7 new net store openings in the comparable period last year.
China and Asia sales were up by 24.7% to $266.9 million as Starbucks opened 209 stores in the region, roughly half of total worldwide openings this quarter. The adverse Japanese Yen movements and shift to company-owned stores impacted operating margins by 330 basis points. Operating margins were still a very healthy 30.4% of revenues.
Other Focus Areas
While most of us know Starbucks from the actual coffee bars, it owns smaller other businesses as well. Channel development revenues rose by 7% to $401 million on the back of increased sales of premium single serve products as margins rose nicely by 370 basis points to 29.6% of revenues.
While Starbucks is best known for coffee, it acquired Teavana in 2011 for $620 million, thereby boosting its tea offerings. Revenues from this business rose sharply to $159.2 million, while posting a modest operating profit. Not only has the company focused on tea, but it has boosted offerings of healthy juices and quality bakery offerings through the acquisition of La Boulange as well.
Solid 2014 Ahead
For 2014, Starbucks sees a solid revenue growth of 10% or greater, suggesting revenues to come in above $16.4 billion. This growth is driven by comparable store sales growth in their mid-single digits. Operating margins are expected to increase by 150 to 200 basis points compared to 2013, with margin gains projected in each geographic area.
Second quarter earnings are seen between $0.54 and $0.55, while full year earnings are seen between $2.59 and $2.67 per share. Previously the company foresaw earnings of $2.55 to $2.65 per share. All this growth is based largely on 1,500 new global store openings as well, with the pace of openings slowing down during the year. Half of these openings are targeted in the wider Asia region.
At the start of November, I checked out the prospects following the fourth quarter earnings release. Ever since shares have fallen by some 10%, which is a noticeable drop. Comparable store sales growth is slowing down a bit, made up for by more aggressive expansion plans and steeper operating margins.
At 28 times 2014's earnings, shares are not cheap. While growth potential remains, thanks to store based expansion and cross-selling, operating margins are already very high. While the company has done extremely well, I fail to see the excessive upside potential at current levels and therefore remain on the sidelines.