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EPS guidance was back-loaded for 2012 as coffee costs are expected to depress margins in the near term.  The top-line remains as impressive as ever.

Starbucks posted EPS of $0.37 for the fiscal fourth quarter of 2011 versus consensus expectations of $0.36.  U.S. comps came in at +10% versus expectations of 7%.  International comps gained +6% during the quarter versus the Street at +4.5%.   CPG revenues came slightly below the Street at $242.2mm but operating margin was 31.4% versus 28.4% expectations.

Starbucks remains one of our favorite long names and we continue to be long the stock in the Hedgeye Virtual Portfolio. 

Below are out top ten takeaways for the quarter: 

  1. EPS guidance was lowered for the first half of 2012 but full-year EPS was maintained.  Management emphasized that this was due solely to coffee cost pressures.  We view this as a slight negative but expect the company to achieve FY12 EPS guidance.
  2. Starbucks’ top-line remains strong and we would expect that to continue in FY12 as management diligently identifies and attacks new media of growth.  The My Starbucks Rewards program is gaining more and more traction.  There are now over 3.6 million active members, nearly 2 million of whom are gold level members.  In FY11, over $1.1 billion in purchases was paid for using the Starbucks card.  The mobile apps (iPhone and Android) are also gaining users.  At the end of September almost 1 million smartphones had registered Starbucks cards associated with them.  We believe that the mobile apps and other initiatives that add to the customer experience will continue to differentiate Starbucks and help boost sales.
  3. The U.S. business remains strong despite the soft economy, as the results show.  The fall promotions featuring Pumpkin Spice Latte and Salted Caramel Mocha and Taizo Chai tea beverage platforms helped drive 4Q sales.  Sales of the Pumpkin Spice Latte grew 44% year-over-year.
  4. In FY12 the company will open 200 locations and remodel 1,700 stores in the U.S.  This is the largest number of remodels ever carried out in one year. 
  5. The international business continues to present the company with growth opportunity as the company operates over 6,200 stores in 55 international markets.  Last week the 500thStarbucks was opened in China and the company still aims to have 1,500 stores open in China by 2015.  The pace of new unit opening will accelerate in 2012.  Margins in China are expected to continue to be in the near-30% range.
  6. The company is bullish on the prospects of its new bagged coffee offering, Starbucks Blonde Roast.  The company believes there is demand from roughly 54 million (40% of U.S. Coffee drinkers) domestic coffee drinkers who want Starbucks quality in a lighter, super premium roast coffee.
  7. The company is equally bullish on the prospects of its K-Cup business, which is expected to launch next week.  Management acknowledged that some cannibalization of the CPG business is likely but sees any impact as small and expects both businesses to growth over time.  Particular to single serve, the company noted that about 8% of households in the U.S. have a single serve brewer in their homes.  Their expectation is that that number will grow over the next five years, perhaps even triple. Starbucks anticipates that K-Cups will represent a greater-than-$1 billion business over time.
  8. Business in Canada had been soft earlier in the year but the fourth fiscal quarter brought a strong uptick for the company’s roughly 800 locations north of the border. 
  9. Business in Europe continues to be “a bit soft”.  “Over-time”, however, management expects the EMEA locations to progress toward mid-teen margins.
  10. Management’s projection for global store growth remains unchanged at 800 net new stores.  Roughly 400 of those will be in the Americas regions with licensed stores comprising roughly half of the new additions.  300 will be in China and Asia-Pacific (licensed will be 1/3 to 1/2 of new additions) and 100 will be in EMEA (licensed will be 2/3 of new additions).

SBUX: GLOBAL GROWTH - sbux pod1

 

SBUX: GLOBAL GROWTH - SBUX quadrant

 

Howard Penney

Managing Director

Rory Green

Analyst