Starbucks Promising Higher Earnings And Profit Margins

| About: Starbucks Corporation (SBUX)

Starbucks Corporation (NASDAQ:SBUX) released its first quarter earnings for 2014 on Thursday, January 23rd, 2014. New store sales openings across the globe and surging demand for coffee in the emerging markets enabled Starbucks to report positive earnings but the company fell slightly short of analysts' estimates. The company has beaten analysts' estimates in some geographical regions and fell short in others. The following is a detailed discussion of how the company performed in relation to what analysts and investors predicted.


The company reported net revenues of approximately $4.24 billion against the analysts' estimate of $4.29 billion. The lower actual earnings were mainly because of the faltering revenue level from the US as a function of poor economic conditions over the past few years and changing shopping trends among consumers.

Revenue growth from a geographical perspective is shown in the following table.

Source: First Quarter Report, 2014

Over the past five quarters the revenues of the company have generally followed an upward trend growing at a CAGR of approximately 3.10%. In annual terms the revenues of the company grew by 12% compared to the first quarter earnings of 2013. Reportedly, the growth in earnings was mainly driven by new store openings across the globe with an additional 417 net new stores added to the existing store count of 19,767.

The America region includes the US, Canada, and Latin America. The sales figure from this region grew by 8% YoY, however, customer visits dropped by 14.6% towards the end of 2013. Low customer traffic is attributed to the changing trends in the developed world where people now prefer to do online shopping over brick and mortar stores thus leading to lower sales figure during the holiday season. The company is tackling the problem by opening new stores in train stations and universities instead of malls. According to the earnings report released this quarter the company has already opened 142 new stores this year in the Americas.

Revenues from Europe, the Middle East, and Asia (EMEA) have grown by 11% while the China and Asia Pacific (CAP) region showed a 25% growth when compared to the sales of last year. Starbucks is aggressively opening new stores across these regions. The company opened 64 new stores in the EMEA region and 209 new stores in the CAP region.

With regards to the operating income the company's income from continuing operations showed a 29% increase. The EMEA region's operating income tops the other regions with a growth of 50% in the top line.

Source: First Quarter Report, 2014

The same store sales of the company grew by 5% on a global level compared to analysts' estimates of 5.9% collected from Consensus Metrics. Looking at same store sales geographically, the China and Pacific region beat the analyst consensus by 30 basis points and showed a growth rate of 8%. Europe, Middle East, and Africa on the other hand superseded analysts' expectations by 300 basis points reflecting a growth of 5% compared to analysts' estimates of 2%. The Americas, however, showed a dismal performance and fell short of analysts' expectations by 140 basis points.

Margins and Per Share Earnings

With regards to the margin performance of the company, Starbucks showed increasing operating margins in every region except China and Asia Pacific. The region shows a decelerating trend in its operating margin although it is still the highest when compared to the operating profits of other regions. Consolidating the results from around the globe, the company's operating margin increased by 2.6% YoY.

Source: First Quarter Report, 2014

The impact of a higher operating margin trickled down to the net margins as well and led to a higher EPS than expected by the analysts and the company.

The company showed a 25% YoY increase in per share earnings which equaled $0.71 this quarter compared to $0.57 in the same period last year. The actual EPS figure exceeded the analyst estimates ($0.69) by 0.02 cents per share. The company itself had determined an EPS range of $0.67 to $0.69.

However, some analysts believe that if we minus the impact of the non-recurring event of litigation charges the EPS of the company will equal exactly $0.69meeting average analysts' expectations.

Future Outlook

To counter the decelerating trends of walk-in customers in the developed markets the company is exploring new ways to connect with customers. Starbucks is also diversifying its business geographically and is adding a number of new items to its product portfolio.

In the current year, the company plans to open about 1,500 stores globally including 600 stores in the US, Canada, and Latin America. In November 2013, the company opened its first store on a train in Switzerland to counter the impact of declining in-store customer visits as consumer traffic declined in the malls in favor of online shopping. Moreover, the company has added Teavana, a San Francisco Bay-area bakery, and is planning to partner with Danone SA that sells Greek yogurt parfaits.


In light of the recent changes in the company in response to shifting industry trends Starbucks raised its expectations for the next year. The company hopes to earn $2.59 to $2.69 by the end of fiscal year 2014.Previous estimates were in the range of $2.55 to $2.67. The year 2014 looks to be a promising year for the company. The company has performed better than its competitors over the most recently ended quarter and is also expected to continue to generate higher earnings in the future. Higher earnings and profit margins will result in an enhanced level of profits for investors' bank accounts through dividends and share repurchases. The company has repurchased 0.6 million shares this quarter and paid dividends of $0.26 per share compared to $0.21 per share during the corresponding quarter of the previous year. As the earnings of the company increase, so will the dividends per share.

The stock market performance of the company is expected to improve from the current level as well since the company is making strategic investments around the globe. In the light of all the facts gathered and the future outlook of the company I would recommend buying the stock as a long-term investment.

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.