Starbucks - Strong Third Quarter Comparable Sales And Upbeat Guidance Sends Shares Higher

| About: Starbucks Corporation (SBUX)

Shares of Starbucks (SBUX) are rising up to 8% in after hours trading. The roaster and marketer of specialty coffees reported a strong set of fourth quarter results after the close.

Fourth Quarter Results

Starbucks reported third quarter revenues of $3.36 billion, up 11% on the year. Growth was predominantly driven by comparable store sales growth of 6%, as a result of 5% increase in traffic and a 1% increase in pricing. Revenues fell short of analysts expectations of $3.39 billion.

Starbucks reported diluted earnings per share of $0.46 per share, down a penny from last year's final quarter. This includes a $0.02 charge related to store optimization initiatives in Europe. Net income came in at $359.0 million, virtually unchanged compared to last year. Reported earnings per share beat analysts consensus by a penny.

During its fiscal 2012, Starbucks repurchased some 12 million shares. Under its current authorization, the company can repurchase another 12 million shares.

CEO and Chairman Howard Schultz commented on the results, "Our Q4 and overall 2012 fiscal year performance demonstrates the strength of our business and brand. The resiliency and relevance of our US retail business, acceleration of the Channel Development business and expansion in Asia contributed significantly to our strong results. I am incredibly proud of our 200,000 Starbucks partners around the world who have contributed to the success of the company and I am optimistic about achieving our aspirations for the future."

Segmental Information


Revenues in the Americas rose 9% to $2.51 billion, driven by a 7% increase in comparable sales, boosted by 5% traffic growth. The company net opened 250 new stores during the quarter. Operating income rose 21% to $536.3 million as operating margins rose by 210 basis points. Margins rose to 21.4% on the back of higher sales leverage.


Revenues in Europe and the Middle East fell by 2% to $283.7 million. Lower revenues were the result of unfavorable exchange rates, despite the opening of 33 new stores. The company reported an operating loss of $6.5 million, for a negative margin of 2.3%. Margins fell by 320 basis points on the back of costs related to cost optimization initiatives.

China & Asia Pacific

Revenues in the Asian division rose 23% to $198.0 million. Growth was driven by net 132 new stores openings during the quarter, and a 10% increase in comparable store sales. Operating income rose 11% to $65.2 million. Operating margins fell 340 basis points as a result of higher investments related to support an acceleration of growth in China.

Channel Developments

Revenues from the channel development unit rose 32% to $318.5 million. Starbucks and branded K-Cup portion packs boosted sales performance. Operating income rose 26% to $100.8 million. Operating margins fell by 160 basis points to 31.6% on the back of higher coffee costs.


For its fiscal 2013, Starbucks targets to open 1,300 net new stores across the globe as the company accelerates its growth plans in China. New store openings will for the majority take place in North America and China/Asia-Pacific. Last quarter, Starbucks guided for 1,200 new store openings.

Revenue growth is expected to come in between 10 and 13%, driven by new store openings, mid-single-digit comparable sales growth, and growth in the Channel development business. Operating margins are expected to increase by another 100 basis points.

Consequently, earnings per share are expected to come in between $2.06 and $2.15 per share, up 15 to 20% on the year. Earlier the company guided for full year 2013 earnings of $2.04-$2.14 per share.


Starbucks ended its fiscal year of 2012 with $2.0 billion in cash, equivalents and short term investments. Long term debt came in at $550 million, for a net cash position around $1.5 billion.

Full year revenues for 2012 came in at $13.3 billion. The company reported a net income of $1.38 billion, or $1.79 per diluted share.

Factoring in a 8% jump in after hours trading, the market values the firm at $38.5 billion. This values operating assets at roughly $37 billion. As such, the market values the operating assets at 2.8 times 2012s annual revenues and 27 times annual earnings.

Starbucks pays a quarterly dividend of $0.21 per share, for an annual dividend yield of 1.8%.

Investment Thesis

Year to date, shares of Starbucks have risen around 10%. Shares rose from $46 in January to highs of $62 in April. Weaker earnings send shares to lows of $43 in August. Shares recovered and are currently exchanging hands at $50 per share.

Shares performed very well over the past five years as investors applauded the return of Howard Schultz to restructure the troubled company at the time. Shares steadily rose from lows of $9 in the beginning of 2009, setting all time highs earlier this year. Between 2008 and 2012, revenues rose from $10.4 billion to $13.3 billion. Net income rose from $315 million to $1.38 billion over the same time period.

Investors applaud the full year results and the upbeat outlook for its next year. Valuation multiples are expected to come down to 2.5 times annual revenues and 23 times annual earnings. A recent dividend hike boosted the annual dividend yield to 1.8%.

Starbucks has announced some encouraging developments in recent months. This includes the first store openings in India and in the Nordics. Starbucks furthermore announced the introduction of the Verismo System in more than 6,400 locations. Recently, the company announced a partnership with Square to provide mobile payment solutions. Starbucks is also rapidly diversifying its offerings at stores, including juices, more teas and even energy drinks.

Investors are relieved that Starbucks reported a decent final quarter of its fiscal 2012, driven by strong comparable sales growth. In recent months, other large US food franchise chains including McDonald's (MCD) and Chipotle Mexican Grill (CMG), reported disappointing same store sales growth. Shares are fairly valued at the moment, but I see few short term triggers at the moment for further gains.

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.