SBUX TRYING TO MAKE THE QUARTER?

Takeaway: $SBUX is stepping up its K-Cup discounting into quarter-end. Not a good sign for its K-Cup business or the overall K-Cup category

Last minute deals in the final days of the quarter?  Since this is not a typical Starbucks move, the question is: are they straining to hit estimates for the quarter?

 

The following offer from Starbucks has come to our attention:

 

“Starting Thursday (9/27) through Sunday (9/30), when you buy any 12-count box of Starbucks K-Cup packs you will receive a 2nd pack free.”

 

Early this morning, our limited and brief survey of a couple of Starbucks stores revealed no knowledge of the K-Cup promotion.  We are left with the following questions?

  • Was this promotion a last-minute strategy decision by the company?
  • Were the K-Cups not selling well?
  • Is there too much inventory at the moment?
  • Has Green Mountain’s pricing strategy slowed the share gains Starbucks was seeing?

The company began selling K-Cups on June 12th yet already we have discounting like $7.99 for a box of 10 and now, in the final days of the quarter, a buy-one-get-one-free offer has come about.  If demand for K-Cups is so strong, why are we seeing such aggressive discounting across the board?

 

Starbucks has taken approximately 15% market share in the K-Cup market and this, clearly, has been a negative for other players in the category.  Margins are likely to be pressured in the K-Cup business going forward.

 

SBUX TRYING TO MAKE THE QUARTER? - stabucks LTO

 

Estimates & Outlook

 

Consensus 4QFY12 of $0.45 – 21% growth versus 4QFY11 – look aggressive but we expect the company to make the quarter.  5-5.5% same-store sales is a reasonable range to assume for 4QFY12 but we think that the 1QFY13 estimate of 4.9% may not be conservative enough.  Recent commentary from management suggests that the results from EMEA could, once again, disappoint in 4QFY12. The consensus EMEA same-store sales number, per Consensus Metrix, is 0.5%.  We believe a negative comp is in play.  The China/Asia Pacific consensus estimate of 11.7% looks possible; both McDonald’s and Yum Brands continue to post strong numbers in that region.

 

Overall, we remain concerned that Starbucks are growing expenses faster than revenues as they pursue an aggressive growth strategy on several different fronts.  At a point, we will become positive on Starbucks again, but for now we are waiting and watching. 

 

 

Howard Penney
Managing Director



Rory Green
Analyst

 


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