Starbucks posted another strong quarter and the stock is up in aftermarket trading.  We have been long Starbucks since March 2009 and continue to like the long term prospects of the company.


We expected a strong quarter from Starbucks but not a massive beat and the quarter was largely in line with what we expected.  EPS came in at $0.36 versus expectations of $0.34.  Domestic comps were +8% versus consensus +5.3%.  International comps were +5% versus consensus +5.1%. 


Below are the same-store sales charts for domestic and international stores as well as our top ten takeaways from the earnings call.







Top Ten Takeaways:

  1. Earnings growth guidance is, we believe, secure for the company in 2011 and we also feel comfortable with the FY2012 EPS growth guidance of 15-20% given the coming rollout of K-Cups in CPG channels, other sales boosting initiatives, and the company's “LEAN” principles.
  2. Same-store sales in the U.S. completely blew away expectations, coming in far above consensus expectations at 8% (against a 9% comp in the year-ago quarter).  We believe that Starbucks continues to gain traction with consumers.
  3. The strong top-line performance should continue; the company is at the cutting edge when it comes to technology and social media.  Along with Domino’s, another company taking share, Starbucks utilizes technology to improve the guest experience.  The Starbucks iPhone app is one example, allowing customers to pay via their mobile devices and, as part of a recent introduction, send e-gift cards to friends for Starbucks purchases.  Between Android and iPhone apps, the company stated that there are now 1 million devices with more than $50 million loaded for use specifically at Starbucks.
  4. The brand loyalty that Starbucks inspires is almost peerless.  The Starbucks Card and loyalty program had a record quarter in Q3 activating nearly 150,000 cards per day during the quarter and generating a 38% increase in dollars loaded on to cards over the period.  Additionally, Starbucks is the most popular brand on Facebook.
  5. Growth potential for Starbucks remains.  The CPG business, with the rollout of K-Cups is one avenue but store growth also remains a valuable revenue driver.  Next year’s initial revenue growth guidance is 10% driven by CPG, mid-single digit comps, and 800 net new stores.   200 are expected to be domestic and 600 in international markets (150 in China).  Key targets for further, longer-term unit growth include Brazil, which has less than 100 stores, and can one day have at least 1,000 stores according to management.
  6. China is a key focus for Starbucks and the company is following a very meticulous approach to its strategy there.  For instance, recently, the company formed a JV with a farming group in Yunnan, China to produce and process coffee.  As global demand rises, Starbucks is positioning itself shrewdly.
  7. Commodity cost inflation will remain a problem for the company over the remainder of the year.  Full year EPS impact from commodity inflation is expected to be $0.22 with $0.08 coming in 4Q after 3Q’s $0.07 impact. 
  8. K-Cups are expected to add $0.03-0.05 in EPS in 2012.  This is included in the company’s guidance for EPS growth of 15-20% year-over-year for the year.
  9. The company has north of a billion dollars in cash and is looking to increase its activity in the M&A markets going forward.  In 1999, Starbucks acquired Tazo Tea which is now generating more than $1 billion in system-wide sales.  According the management, tea is a $90 billion global market and the second-most consumed beverage in the world after water.
  10. Our final takeaway is that it is ludicrous to pay a higher multiple for the Dunkin’ Donuts “growth” story than the growth that Starbucks promises.  Starbucks has delivered for years as a public company and is a global brand with quantifiable and undeniable appeal for consumers, globally.  Dunkin’ Donuts is a great but regional domestic brand with no track record as a public company.  Sure, the company plans to grow into new domestic markets but growth is expensive as BWLD discussed on its earnings call.  Furthermore, if the brand doesn’t resonate as much as expected in new markets, and the ROI doesn’t meet what the current multiple implies it should be, it could pop the Dunkin’ bubble.


Howard Penney

Managing Director


Rory Green



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