Starbucks: Gaining Momentum

| About: Starbucks Corporation (SBUX)

Powered by 260 bps improvement in operating income and 12% rise in revenues, Starbucks (NASDAQ:SBUX) reported another excellent quarterly result on January 23, 2014. The growth in the revenue is fueled by 5% growth in comparable store sales and addition of 417 net new stores during the quarter. The earnings per share for the quarter stood at $0.71, as compared to $0.57 during the same period last year.

Before going to conclusions, let's see the segment-wise performance of the company:

  • Americas segment results:

The revenue for the segment grew 8% from $2.8 billion to $3.1 billion. Operating income grew 24% from $590 million to $732.1 million. Operating margins improved by 300 bps to 23.8%. The segment saw the opening of 142 new stores.

  • EMEA segment results:

The revenue for the segment grew 11% from $306 million to $339 million. Operating income grew 50% from $22.3 million to $33.5 million. Operating margins improved by 260 bps to 9.9%. The segment saw the opening of 64 new stores.

  • China/Asia Pacific segment results:

The revenue for the segment grew 25% from $214 million to $266.9 million. Operating income grew 12% from $72 million to $81 million. Operating margins declined by 330 bps to 30.4%. The segment saw the opening of 209 new stores.

  • Channel development segment:

The revenue for the segment grew 7% from $374 million to $401 million. Operating income grew 23% from $96.8 million to $118.8 million. Operating margins improved by 370 bps to 29.6%.

  • All other segments' results:

The revenue for the segment grew 174% from $58 million to $159 million. The segment reported a turnaround by reporting an operating income of $13.6 million from an operating loss of $4.2 million. The segment saw the opening of 2 new stores.


The results are good on all fronts. The traffic is improving and the new store opening is gaining momentum in all regions, which shows that the business environment is good and the company is confident about the future. The key thing about the company is its growth potential.

  • Gaining momentum in emerging markets:

The quarter once again reaffirms that even if the growth momentum in (for coffee business) America region slows down due to huge scale the company still can carry on with its growth momentum as the company is gaining a strong foothold in emerging markets.

The company stated in the post-results conference call that China is "on track to become Starbucks' largest and most successful market outside the U.S.", and In India "demand for Starbucks stores throughout India literally is at a fever pitch."

These statements reflect the success of the company in the world's two most populous countries where the demand for coffee beverages is growing at a rapid pace. The company's success in the emerging markets, first in China, and now in India sets the strong foundation for the company to show a consistent growth in the coffee business in the years to come.

  • Leveraging retail expertise in tea:

The company is moving ahead smoothly with its initiatives in tea market. The quarter marks the opening and success of first two Teavana tea bars in New York City and Seattle. With the success of the tea bars the company is looking forward "to bring breakthrough innovation to the tea category in the U.S. and Canada this spring and summer and to the international markets in the years ahead."

Tea market is a huge opportunity for the company. The initial success will prompt the company to expand at a faster rate, which will further add to the growth momentum of the company.

  • Leveraging existing retail infrastructure (Premium handcrafted, cold carbonated beverages):

Another important area in which the company advanced during the quarter is over $140 billion global carbonation industry. The test launched conducted by the company in the selected stores of the U.S. and Asian market exceeded the company's most optimistic expectations. With the excellent results of the test launch, the company is all set to introduce handcrafted cold carbonated beverages in several stores in the months and quarters ahead. This will allow the company to further leverage its existing retail infrastructure in the future.

  • Coffee prices:

The margins of the company to some extent depends on the global coffee prices, which since the last few quarters are in the company's favor that means the coffee pieces was declining (see the chart below). However, since the beginning of 2014, the prices are showing a upward trend that can affect the margins adversely (to some extent), if the trend continues.

Starbucks Corporation is well known for its success as a roaster, marketer, and retailer of specialty coffee worldwide. Even after reaching such a large scale the company still holds a lot of growth potential, not just in coffee business but also beyond coffee. The quarter gone by is not only good in the terms of results, but also for the first time the company confirm its expansion plans for the premium handcrafted, cold carbonated beverages industry. The expected speedy expansion in the tea market is another positive.

All in all, an excellent quarter, which once again showed that the company is not only growing in the coffee beverage market but also is gaining momentum in the markets that holds lots and lots of growth potential for the future and will accelerate the growth of the company in the long-term.

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