Starbucks: Early Preparation For The Digital Era Is Finally Paying Off

| About: Starbucks Corporation (SBUX)
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From the successful running of the Evolution brand to the gaining popularity of the "Dumb Starbucks" shop, Starbucks Corporation (NASDAQ:SBUX) doesn't intend to leave the limelight anytime soon. The company has seen its share price rise to more than $70 year to date and the 32% increment that brought $17 to investors' pockets was the result of successful management and catering to markets that are supposed to outperform.

In this article, I will analyze the company's first quarter of 2014 and determine how it recently impacted shareholders' value. Later, I will shift our focus towards how Starbucks intends to continually add returns to shareholders' portfolios.

The First Quarter of 2014

Source: Earnings Release

The company recently broke all previous records owing to strong holiday sales and store traffic that drove revenue up 12% from last year's level to $4.2 billion. Global comparable store sales were up 5%, with international territories, especially China, showing a higher (8%) rate of growth. The success of the international locations was the result of the company using successful domestic strategies and putting them into play abroad.

A decrease in coffee costs by 80 bps was due to better pricing and helped the cost of sales decrease to $1.8 billion, falling 40 bps from a year ago quarter. The same momentum continued for store operating expenses, as they declined as a percentage of revenues by 130 bps during the quarter primarily driven by higher litigation charges in the prior year quarter, and decreased marketing expenses mainly due to the lapping prior year launch of the Verismo system by Starbucks in company-operated stores.

The net effect was the operating income increasing by 29% to $813 million with margins taking a 260 bps hike. This was a positive effect, considering it caused higher revenue and falling costs. EPS grew to $0.71, reflecting a 25% increase for investors from the prior year quarter.

All in all, the beginning of 2014 was positive, considering the results of international operations and the launch of healthy alternatives. The bottom line also showed improvement. Going forward, there are some points that continued and will continue driving the future growth of the company.

The Future

Preparedness Paved the way for Starbucks' Store Revenue

Starbucks' attention to the online shift is finally paying off. The last holiday season was the first in which buyers took advantage of the convenience and flexibility available through physical and digital gift cards with enthusiasm. Instead of gifting a particular item, many consumers now choose to give the gift of choice through gift cards. Starbucks prepared itself for these alterations by investing significant CAPEX in the creation and development of proprietary digital and mobile payment solutions.

The company's mobile app is now a highly used digital payment app in America. Nearly 10 million customers pay for their beverages with the app and make more than 5 million transactions per week. The app, together with other digital innovations, enabled the company to receive more than 40 million new Starbucks card activations during the last quarter. The revenue figure was $610 million for the US and Canadian territory. These purchases are presently growing at a rate of 2 million new Starbucks card activations per day and already make up $1.4 billion of the company's card loads globally.

Imagine the scale at which these payments will contribute in the future now that the company is expanding into providing healthier alternatives that include the Evolution brand acquired back in 2011. The company recently expanded the juice brand by making it available in more than 360 Chicago-area Starbucks stores.

For 2014, Starbucks will continue its nationwide distribution of Evolution Fresh through its US company-operated stores. As consumers become more aware of this brand the sales are likely to significantly improve.

Chinese Expansion

Nearly Half of the Store Openings for 2014 are in China

Now, speaking from a geographic front, Starbucks' expansion into China is a wise choice. The market is already showing growth rates above the company's global operations. Since China is a tech savvy country, this pushes the opportunity to release the app; a strategy that Starbucks hasn't initiated. The factors I have discussed above in support of digital payments that are doing wonders for the company in the US hold the potential to generate the same response, perhaps higher, within China.

Also, apart from coffee, the company's acquisition of Teavana in 2012 provides a little edge in a country that has a long history of tea-drinkers. This will make Starbucks a preferable choice when rivals solely compete for a coffee-based market share. Also, the standard of living in China is growing, so Asian consumers will begin visiting commercial sellers when previously, they relied on home brewed hot beverages.

A Preferred Choice

Source: Trefis

The above discussion makes a good argument for why the number of daily customers per store is on the rise for Starbucks (see graph above). This is expected, given Starbucks' techniques to lure in customers. The region of China has still not started showing its true return; however, once the company opens its app in the region, that should change. The Evolution brand will also show promising returns once it is rolled out into the greater regions during this year. All of the above make me certain that Starbucks will stay persistent in giving strong returns to its shareholders. Therefore, I give the company a strong buy rating.

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.