Growth And Tea Could Push Starbucks To $90

| About: Starbucks Corporation (SBUX)


Starbucks met analyst estimates by growing earnings 17% and revenue 9% year over year.

Global same-store comp was 6%, and margins expanded despite concerns about rising commodity prices.

The Starbucks brand is nowhere near saturation with new store locations and strong comps.

Teavana could provide Starbucks access to the large tea market, propelling strong growth for years.

After the bell on Thursday, Starbucks (NASDAQ:SBUX) reported its fiscal second-quarter results. As we have come to expect from CEO Howard Schultz and the rest of management, the numbers were quite strong, and shares were trading up about 2% after-hours. Despite its large size, Starbucks continues to be one of the faster growing quick-serve restaurants thanks to growing popularity and a solid international growth strategy. If the company can monetize tea as well as it has coffee, the growth story is still in the early innings. Investors should continue to hold or open a long position in Starbucks.

In the quarter, SBUX earned $0.56 on revenue of $3.87 billion, both of which were in line with analyst estimates (all financial and operating details available here). Revenue was up 9% year over year. Global same-store sales growth was 6% compared to 5% in the previous quarter and 6% a year ago. Despite terrible weather across much of the Northeast and South during the quarter, U.S. same-store growth was 6%. Starbucks also had the best quarter in Europe, Middle East, and Africa (EMEA) it has had in 3.5 years with comps up 6%. This is another indicator that the European economy is slowly returning to growth. With Europeans finally getting a bit more discretionary income, we should see solid growth from EMEA. China and Asia Pacific continue to provide solid growth with comps of 7%.

Overall, Starbucks grew earnings per share by 17% thanks to an 18% increase in operating income. There have been a lot of concerns about rising coffee and dairy prices, even though Starbucks has hedged much of its commodity risk for the next twelve months. In fact, operating margins were up 130bp to 16.6% year over year, a Q2 record. Locations are busier than ever, which is helping to drive margins higher. Fears about rising commodity prices are overdone, and margin erosion is not a near-term concern. Given the strength of the brand and continued same-store sale growth, SBUX also has the ability to pass on some rising costs by increasing prices if necessary in 2015.

Starbucks total revenue growth continues to exceed same-store sales growth because it continues to open new locations. In the quarter, Starbucks opened 335 net new stores bringing its global store count to 20,519. In the year ago quarter, SBUX added 590 stores, but this includes its purchase of 337 Teavana acquisition. Normalizing for this, Starbucks actually opened 82 more stores this quarter than it did a year ago. Even though the company is getting larger, it is finding even more growth opportunities. Importantly, these new stores are opening around the world.

Starbucks opened 128 locations in the Americas, 32 in EMEA, and 174 in China and Asia Pacific. Teavana accounts for less than 500 of Starbucks' store count even though tea is actually a bigger global market than coffee. Combine the global popularity of tea with Starbucks' competence with baked goods and a café environment, and there is the potential for massive growth. It will take years though to develop the Teavana brand into one that can rival Starbucks in size. The company may not be able to do that, but it is clear there is room for a significant expansion of Teavana beyond 500 locations. This growth comes on top of the growth the Starbucks brand is experiencing. Even as the breakfast environment becomes more competitive, Starbucks delivers robust growth.

For the full fiscal year, Starbucks continues to anticipate revenue growth to exceed 10%, margin expansion of 175-200bp, and upped its EPS guidance to $2.62-$2.68. Management has a history of providing mildly conservative guidance to ensure to it beats numbers. I continue to expect full-year EPS of $2.67-$2.75, which would be about 20% higher than 2013 EPS. Shares are trading at 26x earnings, which is not that expensive considering the company's growth rate. On a per location basis, Starbucks trades about on par with McDonald's (NYSE:MCD) despite faster growth.

It is important to recognize that Starbucks is growing quite fast this year, but it will maintain a brisk growth rate for years to come. Starbucks is nowhere near saturation in developed markets as seen by strong comps, and location expansion will drive even faster revenue and profit growth. Starbucks is also a leader in Asia and China and will benefit as these nations continue to expand their middle class. Ignoring the Teavana brand, Starbucks has a lot of growth ahead. On top of this, there is the potential that Starbucks can do for tea what it did for coffee, which would drive substantial growth for years as it builds out the Teavana brand. At $70-$75, investors can buy Starbucks at an attractive valuation while essentially getting a free call option on Teavana. I would not be surprised to see shares trading towards $90 over the next 12 months.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SBUX over 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.