Starbucks: Innovation Driving Business Forward

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Musings of a Banker
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Summary

  • Broad-based growth across all geographies and business metrics.
  • Comparable sales growth of 7% (3% traffic growth, 4% ticket growth).
  • Innovations such as "Mobile Order & Pay" exceeding all expectations.
  • DCF methodology suggests value of $60 per share.

Starbucks (NASDAQ:SBUX) reported very strong Q2-15 results with reported revenues ahead by 18% to $4.6 billion, driving split-adjusted EPS also up by 18% to $0.33 per share. Innovations are the key to SBUX's success with initiatives such as "Mobile Order & Pay" exceeding all expectations. Growth was broad based in all geographic regions, which has led to full year earnings guidance being raised to $1.77-$1.79 per share.

Broad-based growth highlights strong ongoing momentum

SBUX's Q2-15 results were very encouraging indeed, with global comparable sales ahead by 7% (3% traffic growth, 4% price/mix) with all geographic regions contributing positively on an underlying basis, as shown in the table below. Key highlights include the 18% increase in total revenues (20% at constant FX), some 1,511 net new stores opened in the last 12 months, the 21% increase in operating income to $777 million and a 40bps increase in the group operating margin to 17%.

SBUX highlighted that the company will open its 1,600th store in China this year and the company is now present in 87 cities in that country. Interestingly, the 12% comparable sales growth figure was entirely driven by increased traffic in the quarter, which highlights just how effective SBUX's innovation drive has been so far in encouraging new customers into the stores.

Innovation, the key revenue and margin driver

On the Q2 conference call, a key highlight was how well SBUX's innovation initiatives are working. Innovations such the "Mobile Order & Pay" experience have "exceeded every goal" according to CEO Howard Shultz. This initiative was expanded across the Pacific Northwest region on March 17th and is now available in over 650 stores. The facility is driving greater retail efficiency and encouraging new customers to stores. Further, the Starbucks card is becoming increasingly popular, with some 19% card load growth in the quarter to $1.1 billion in North America, which clearly bodes well for future revenue growth.

Full-year earnings guidance raised to $1.77- $1.79 per share

After a very strong second quarter, SBUX has raised its full-year GAAP earnings guidance to $1.77-$1.79 per share, with guidance for Q3 and Q4 at around $0.40 per share in each quarter. SBUX has high visibility and predictability on its future revenues plus has most of its major input costs such as coffee, dairy and diesel locked in for FY'15, whereby these costs in aggregate are likely to be flat year over year. This gives me confidence that further margin growth is likely at the group level during H2-15 and beyond.

DCF valuation suggests value of $60 per share

Revenue and earnings predictability is a key valuation driver and Starbucks' growth profile is both visible and predictable. I thus believe that my DCF is an appropriate valuation tool to value this business. In my previous article on SBUX, published on February 4th, I suggested that the stock could reach $100 per share in 2015 (pre the 2 for 1 stock split which became effective on April 9th). At $49 per share now, the stock has reached my equivalent February target price. With the new information from Q2, I now raise my target price to $60 per share, giving a potential upside of 20%.

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Finbox is an online stock research platform designed for individual investors and asset managers who care about understanding a stock’s fundamental value. The platform provides a quick sanity check so that investors can understand what they’re investing in and why.
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Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SBUX over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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