June 13, 2013
Starbucks Corp.
(SBUX – NASDAQ)
$61.87*
Note: This report contains substantially new material. Subsequent reports will have new or revised materials
highlighted.
Reason for Report: FY2Q13 Earnings Update.
Previous Edition: March 13, 2013; FY1Q13 Earnings Update; share price and brokers’ material as of Jan 31,
2013.
Brokers’ Recommendation: Positive: 68.2% (15), Neutral: 31.8% (7), Negative: 0.0%(0) Prev. Ed.: (20,7,0)
Brokers’ Target Price: $64.46 (↑$3.37, 22 firms) Brokers’ Avg. Expected Return: 4.2%
*NOTE: Though dated Jun 13, 2013; share price and brokers’ material are as of May 3, 2013.
Note: A flash update on FY2Q13 Earnings was done on Apr 25, 2013
NOTE: The tables below (Revenue, Margins, Earnings per Share, and Balance Sheet) contain material from
fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not
have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Starbucks Corporation is a retailer of specialty coffee, which includes the Starbucks brand, one of the
most popular coffee brands in the world.
Of the 22 firms following the stock, 15 firms assigned positive ratings, 7 firms provided neutral ratings
whereas none of the firms rated the stock negatively.
Positive or equivalent (15/22 firms): The bullish firms appreciate the strong top-line growth achieved
by the company, particularly in the Americas segment and China-Asia-Pacific segment in 2Q13. They
expect the Americas comp sales to continue to improve in the upcoming quarters. The firms appreciate
the company’s focus on product innovation, particularly in the fast growing premium single cup
category. They also like the company‘s strategy of expansion in markets outside the U.S.
Neutral or equivalent (7/22 firms): The firms with a neutral outlook like the strong balance sheet and
margin expansion witnessed by the company. However, they prefer to remain on the sidelines due to
overall difficult macroeconomic conditions and weak European sales.
Jun 13, 2013
© Copyright 2013, Zacks Investment Research. All Rights Reserved.
Overview
Based in Seattle, Wash., Starbucks Corporation is the leading retailer of specialty coffee worldwide.
The company buys and roasts high-quality whole bean coffee, which is sold along with handcrafted
coffee and tea beverages and a variety of fresh food items. The company operates through companyoperated and licensed stores. The licensed stores are licensing arrangements with business partners to
use Starbucks products. Starbucks’ product portfolio includes the famous Starbucks coffee as well as
other branded products like, Tazo Tea, Seattle's Best Coffee and Starbucks VIA Ready Brew.
The company also offers consumer packaged goods and foodservice operations. The consumer
packaged goods operations include packaged coffee and tea sold in grocery and warehouse club
stores. Under its foodservice operations, Starbucks supplies some products to restaurants, office coffee
distributors, hotels, airlines and other retailers.
Starbucks operates through the following segments: Americas (inclusive of the US, Canada, and Latin
America); Europe, Middle East, and Africa (EMEA); China-Asia-Pacific (CAP); Channel Development
(CD); and Other. The CD segment is not a geographic region but an entirely different channel (referred
to as CPG channel henceforth). The Consumer Packaged Goods (CPG) business reflects everything
outside the Starbucks stores like packaged coffee, foodservice operations, K-Cups, Starbucks VIA
Ready Brew and Tazo tea. The Other category includes Seattle's Best Coffee, Evolution Fresh and
Digital Ventures.
In fiscal 2012, Starbucks acquired Atlanta-based Teavana Holdings, Inc., a specialty retailer of tea, for
approximately $620 million in cash. Teavana has now become a wholly-owned subsidiary of Starbucks.
Brokerage firms identified the following factors for evaluating the investment merits of SBUX:
Key Positive Arguments
Key Negative Arguments
The company commands a strong leadership position,
possesses a powerful brand portfolio, enjoys strong
consumer acceptance, and has global expansion
opportunities.
The price of coffee is subject to significant volatility.
Supply and price can be affected by multiple factors in
the producing countries, including weather, political
and economic conditions.
Continued innovation and new product offerings are The company is facing challenges in its European
expected to drive both top- and bottom-line growth for business due to the region’s poor economic
the company, going forward.
conditions, high unemployment and fragile consumer
confidence.
The CPG business is a largely diverse (in terms of
revenue mix), high margin, high return on capital
business, which has given a boost to both top- and
bottom-line growth in the past few quarters.
Starbucks brand is gaining popularity with consumers
across Asia as the company continuously expands its
store base outside the U.S. The company remains
focused on increasing its presence in China, where
demand is growing very fast and revenue growth is
expected to be robust.
SBUX’s fiscal year ends on Sep 30; fiscal references do not coincide with the calendar year. More
information on the company is available at http://www.starbucks.com/
Jun 13, 2013
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Long-Term Growth
Starbucks intends to maintain its strong brand name and expand in the global market in the long run.
Management focuses on increasing its global market share by judiciously opening stores in new and
existing markets, generating more revenues from existing stores, controlling costs and brand building.
For its Americas segments, the company intends to capitalize on the strong demand for Starbucks
products in America. The company intends to add about 3,000 new stores in Americas over the next
five years, of which 1,500 stores are to be opened in U.S.
The company believes China will become its second-largest market by 2014. China is one of the most
important markets for Starbucks and the company plans to open 1,500 stores in 70 cities in 2015.
The company expects revenues and profits from Europe, Middle East and Africa segment to improve
significantly over the next five years. Also, the company intends to focus on brand building, generating
more revenues from existing stores and increasing licensing agreements in Europe.
The international footprint of the Consumer Packaged Goods (CPG) segment is expected to double by
2015. Starbucks plans to build 100,000 distribution centers in 20 countries.
Starbucks is constantly on the lookout for new additions to its product portfolio, other than coffee, like
La Boulange bakery products and Evolution Fresh juices. Starbucks acquisition of Teavana Holdings
in Dec 2012 will enable Starbucks to expand in the $40 billion global tea market and claim a leading
position.
In Sep 2012, the company introduced the Verismo single cup coffee machine, which allows customers
to prepare Starbucks-quality espresso and coffee drinks at home, using milk pods also developed by
Starbucks. Verismo is a major step by the company to take a share of the premium single-cup
segment, which is the fastest growing market in the coffee industry.
Jun 13, 2013
Target Price/Valuation
Provided below is a summary of target price/valuation as compiled by Zacks Digest:
Rating Distribution
Positive
Neutral
Negative
Avg. Target Price
Digest High
Digest Low
No. of Analysts with Target price/Total
68.2%↓
31.8%↑
0%
$64.46↑
$75.00↑
$53.00
22/ 22
The risks to target price include rise in price of coffee, lower consumer traffic and intense competition.
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Recent Events
Starbucks Meets 2Q Earnings; Misses Sales – April 25, 2013
Starbucks’ adjusted earnings of $0.48 per share for the second quarter of fiscal 2013 were in line with
the Zacks Consensus Estimate. Earnings of this coffee giant grew 20% year over year driven by solid
margin growth.
However, the coffee giant failed to meet the Zacks Consensus Estimate for revenues.
Adjusted earnings excluded a one-time gain from the sale of a minority equity stake in a joint venture in
Mexico.
Revenues and Margins
Total sales for the second quarter increased 11% year over year to $3.56 billion but slightly missed the
Zacks Consensus Estimate of $3.59 billion. Beverage and food innovations and steady sales growth in
the U.S. and Asia were partially offset by weakness in Europe.
Adjusted operating margin increased 180 basis points (bps) to 15.3% driven by strong sales leverage
and lower coffee costs.
Fiscal 2013 Outlook Retained
The company upped its earnings guidance for 2013 but maintained its sales, comps and operating
margin outlooks.
Revenues
Starbucks reported total net revenue of $3.6 billion in FY2Q13, up 11% y/y, on the back of strong same
store sales. The Zacks Digest average revenues were in line with the company report.
Same store sales, which exclude the impact of new company-operated stores opened in the past 13
months, grew 6%, same as in the first quarter. In the quarter, the company opened 590 net new stores
all over the world, including 337 Teavana stores. In December last year, the company bought Teavana,
a specialty retailer of tea.
Provided below is a summary of revenue as compiled by Zacks Research Digest:
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Revenue ($M)
2Q12A
2012A
1Q13A
2Q13A
3Q13E
2013E
2014E
2015E
Digest Average
$3,195.9
$13,299.6
$3,799.6
$3,555.9
$3,707.6
$14,855.4↑
$16,540.4↓
$18,313.0↑
Digest High
$3,196.0
$13,300.0
$3,799.6
$3,556.0
$3,785.8
$14,991.6↑
$16,831.9↑
$18,313.0↑
Digest Low
$3,195.9
$13,299.5
$3,799.5
$3,555.9
$3,612.0
$14,682.5↑
$16,100.8↓
$18,313.0↑
14.7%
13.7%
10.6%
11.3%
12.2%
11.7%
11.3%↓
10.7%↑
Y-o-Y Growth
Segment Details
Americas: Net revenue in this flagship segment rose 10% over the prior-year quarter to $2.60 billion,
attributable to 6% growth in same-store sales. In Americas, the U.S. did significantly well despite the
cautious consumer spending environment, with comps up a strong 7% in the quarter. Growth in the
U.S. was driven by new product launches like Vanilla Spice Latte and Hazelnut Macchiato and
enhanced and expanded food offerings. Starbucks loyalty cards have become increasingly popular and
are a major driver of consumer traffic in the U.S. Latin America also delivered double-digit revenue
growth in the quarter, driven by growth in Brazil and Mexico.
The company intends to open 300 new stores and renovate 14 stores in U.S in fiscal 2013.
Most firms were impressed with the robust comp sales witnessed by the Americas segment during the
quarter. They expect the segment to continue to generate strong comp sales in the upcoming quarters.
Europe, Middle East, and Africa (EMEA): Net revenue was flat year over year at $273.2 million in the
quarter as a 41% improvement in licensed store revenues was offset by a 6% decline in company
operated revenues due to some closings and ownership changes in these stores. Same store sales
declined 2% in the quarter due to continued economic weakness and constrained consumer spending
in the region.
China-Asia-Pacific (CAP): Net revenue jumped 22% to $213.6 million in the quarter, driven by 8%
increase in same-store sales and the rapid pace of new store openings. Increasing popularity of
Starbucks’ loyalty cards and programs and increased sales of seasonal beverages drove this
segment’s revenues and profits. The company has increasingly focused on expanding its business in
the fast-growing Chinese market, which the company believes will become its second-largest market by
2014 and have more than 1500 stores by 2015.
The company is expected to have 4,000 stores in the CAP region by the end of 2013, of which more
than 1,000 stores are in Mainland China and more than 500 stores in South Korea. The company plans
to open 100 new stores in Indonesia over next three years and 100 new stores in Philippines over the
next four years.
Channel Development (CPG): Starbucks’s CPG segment’s net revenue grew 7% year over year to
$343.5 million in the second quarter due to strong performance of Starbucks branded K-Cup portion
packs.
Other: Revenues grew 131% in the quarter to $121.5 million due to inclusion of sales from the newly
opened Teavana stores for the first time this quarter.
Provided below is a summary of segment revenue as compiled by Zacks Digest:
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Revenue ($M)
2Q12A
2012A
1Q13A
2Q13A
3Q13E
2013E
2014E
$2,374.7
$9,936.2
$2,604.1
$2,700.7
$2,755.7
$10,900.4↑
$11,885.1↓
EMEA
$272.4
$1,141.1
$273.2
$283.8
$293.8
$1,149.1↓
$1,224.2↓
China/Asia-Pacific (CAP)
$174.6
$721.3
$213.6
$240.0
$269.4
$954.2↓
$1,330.6↓
Global Consumer Products (CPG)
$237.4
$952.1
$254.6
$251.2
$270.3
$1,065.3↓
$1,214.6↓
Others
$52.7
$208.8
$121.5
$129.6
$132.4
$349.2↓
$467.8↓
$3,195.9
$13,299.6
$3,555.9
$3,707.6
$3,792.4
$14,855.4↑
$16,540.4↓
Americas
Total Revenue
2015E
$18,313.0↑
Note: Blank cells indicate that no estimates have been provided
Provided below is a graphical representation of segment revenue as compiled by Zacks Digest:
Revenue Segments: 2013E
Revenue Segments: 2012A
7%
2%
7% 2%
Americas
Americas
7%
6%
EMEA
EMEA
9%
8%
76%
China/Asia-Pacific
(CAP)
China/Asia-Pacific
(CAP)
CPG
CPG
76%
Total Other
Total Other
Revenue Segments: 2014E
8%
3%
Americas
8%
EMEA
8%
China/Asia-Pacific
(CAP)
CPG
73%
Total Other
Expanding Loyalty Program
Starbucks expanded its My Starbucks Rewards loyalty program from May onward where customers
can earn rewards points under on purchase of packaged coffee at its grocery channels. These points
can be redeemed later against food or beverages at Starbucks stores. The loyalty program has been
extended to SBUX’s emerging brands. By the end of this fiscal year, the company expects to have 9
million members versus 4.5 million members at the end of Oct 2012
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Starbucks’ deal with Green Mountain Coffee Roasters
Starbucks and specialty coffeemaker Green Mountain Coffee Roasters have entered into a new minimum
five-year agreement under which Starbucks will triple the number of Starbucks products that can be run
on Green Mountain’s Keurig brewers. Under the existing agreement, Starbucks manufactures and sells
Starbucks-branded single serve Vue and K-Cup packs to be used on the Keurig platform. Keurig is an
exclusive single-cup machine which makes Starbucks coffee and Tazo tea.
Under the new expanded agreement, Starbucks will supply other brands including Seattle’s Best Coffee,
Torrefazione Italia coffee, Teavana Teas, and Starbucks Cocoa in addition to the Vue and K-Cup packs.
The expanded agreement replaces the first deal entered in Mar 2011.
2013 Outlook
For fiscal 2013, the company continues to expect revenues to grow in the range of 10%–13%, driven by
mid single-digit comparable store sales growth and net new store openings. Starbucks now expects to
open 1650 stores in the year, up from prior expectations of 1300 stores to include 350 new Teavana
stores.
Most of the firms appreciate the strong top-line growth registered by the company and believe that the
company will register further revenue growth in the near future owing to its expansion into the single
serve segment and the global markets outside U.S.
Please refer to the Zacks Research Digest spreadsheet on SBUX for more details.
Margins
Adjusted operating margin of the company grew 180 basis points to 15.3% in FY2Q13, driven by sales
growth and favorable commodity cost. Cost controls and improved efficiency in the retail stores also
boosted margins. The Zacks Digest average operating income was in line with the company report.
Segment Discussion
Americas: Adjusted operating margin improved 220 bps to 21.1% in the quarter driven by strong sales
leverage, improved productivity and cost controls and lower coffee prices. This is the highest 2Q
Americas segment operating margin witnessed by the company.
EMEA: Despite the revenue shortfall, adjusted operating margin increased 450 bps to 1.9% in the
quarter due to portfolio-mix shift towards licensed stores and solid cost control.
CAP: Operating margin at the CAP segment declined 710 bps year over year to 32.0% in the quarter
despite solid sales growth due to higher investment spending to support the fast pace of growth in
China. Moreover, shift in its store mix from licensed stores to lower-margin company operated stores
also hurt operating margins. Also, the prior-year quarter included a one-time gain, which was not
present in this quarter.
CPG: Adjusted operating margin increased 270 bps to 27.4% in the quarter driven by low coffee costs.
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Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins
2Q12A
2012A
1Q13A
2Q13A
3Q13E
2013E
2014E
2015E
Gross
55.8%
56.3%
57.3%
57.0%
56.7%
57.1%↑
57.6%↑
Operating
13.5%
15.0%
16.6%
15.3%
15.8%
16.1%↓
17.5%↑
22.6%↑
Pre-Tax
14.3%
15.5%
16.3%
16.6%
16.1%
16.5%↑
17.8%↑
22.7%↑
Net
9.7%
10.4%
11.4%
11.0%
10.8%
11.2%↑
12.0%↑
16.6%↑
Outlook
Operating margin is expected to expand approximately 100 bps year over year, driven by better
operating leverage.
Most firms appreciated the strong margin expansion witnessed by the company.
Please refer to the Zacks Research Digest spreadsheet on SBUX for more details.
Earnings per Share
Starbucks reported EPS of $0.48 in FY2Q13, up 20% y/y, driven by margin expansion. The Zacks
Digest average EPS was $0.51, beating the company results by 6.25%.
Provided below is a summary of EPS as compiled by Zacks Research Digest:
EPS in US$
2Q12A
2012A
1Q13A
2Q13A
3Q13E
2013E
2014E
2015E
Digest Max.
$0.40
$1.81
$0.57
$0.51
$0.53
$2.19↑
$2.66↑
$4.02↑
Digest Min.
$0.40
$1.79
$0.57
$0.51
$0.52
$2.16↑
$2.54↑
$4.02↑
Digest Avg.
$0.40
$1.79
$0.57
$0.51
$0.53
$2.18↑
$2.60↑
$4.02↑
YoY growth
17.9%
17.8%
14.0%
27.5%
22.4%
21.6%↑
19.4%
54.6%↑
Outlook
Starbucks expects to generate earnings per share of $0.50 – $0.53 in the third quarter. In the fourth
quarter, the company expects earnings of $0.54 – $0.57.
Full year 2013 earnings expectations were increased from a range of $2.06 — $2.15 to $2.12 — $2.18
(includes one-time gain from the sale of a minority equity stake in a joint venture in Mexico in the
second quarter), which is 18% to 22% year over year.
Some firms expect EPS to grow significantly in fiscal 2013, owing to the strong comp sales in U.S. and
margin tailwinds.
Please refer to the Zacks Research Digest spreadsheet on SBUX for more details.
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Jun 13, 2013
September 27, 201
StockResearchWiki.com – The Online Stock Research Community
Discover what other investors are saying about Starbucks Corp. (SBUX) at:
SBUX profile on StockResearchWiki.com
Research Analyst
Lead Analyst
Last done by
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Copy Editor:
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Reason for Update
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Sarmistha Roy Chowdhury
Kinjel Shah
Debasmita Banerjea
Kinjel Shah
2Q13 earnings
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