SBUX THREADS THE NEEDLE

Takeaway: We were cautious on the ability of SBUX to deliver in 4QFY12. The company delivered and demonstrated its growth capability.

Starbucks exceeded our, and the Street’s, expectations during 4QFY12.  The Americas division offset slower international revenue growth as earnings came in at $0.46 versus $0.45 consensus.  The dividend was increased 24% from $0.17 per share to $0.21.  We were advising caution ahead of the quarter, mistakenly, as our concerns about trends sequentially decelerating in the Americas dictated our view of the quarter.  This quarter, and management's commentary, has demonstrated to us that Starbucks is managing its growth accordingly.  The opportunities for the company are vast and 4QFY12 results suggested that management is likely to continue to achieve its goals over the coming months.

 

We backed away from our years-old bullish stance on Starbucks in April based on our concerns around the company’s ability to manage a large portfolio of brands while managing its already-complex business model.  Management’s commentary on the conference call communicated to us an acute awareness of the challenges that growth presents and a willingness to invest proportionately alongside the company’s expansion.  CEO Howard Schultz’ reluctance to reciprocate some analysts’ exuberant expectations demonstrated a sober and grounded approach on the part of management.  Below is a telling quote from Schultz that directly addressed the concerns we have expressed on the company’s rate of growth:

 

“We've been able to thread the needle to maintain and preserve and enhance our premium position as a premium brand while at the same time developing, offering and creating value propositions for our customers that in no way dilute the equity of the brand… we are highly confident that despite any turn in the current economy that we can anticipate, that we have the tools, the resources, and most importantly the power in the marketplace to navigate through this by what we've been able to learn and the muscle memory that is inside the DNA of the company since transforming the company in 2008.”


Below we go through the results and FY13 outlook provided by management.

 

4QFY12 Recap

 

Revenues for the fourth quarter were slightly below expectations but grew at 11% versus 4QFY11 with same-store sales in the Americas providing a substantial upside surprise.

 

Americas

  • SSS growth of 7% vs 5% consensus
  • Treat Receipt promotion in August a success
  • Living Social offer was availed of by 1.5 million customers in less than 24 hours
  • Nearly 500 million K-Cups were shipped in FY12, 15.6% of single cup market
  • Technology playing an increasing role in driving top line
  • Channel development continuing to support sales – blonde roast, refreshers
  • $3 billion loaded onto Starbucks cards in FY12

 

CAP

  • Sales grew 23% y/y boosted by new units and 10% comps
  • Co-op markets – China, Thailand, Singapore, and Australia – had positive comps
  • Management positive on the rate of volume growth in China
  • Unit growth in the quarter was 18.2%

 

EMEA

  • SSS growth of -1% vs 1% consensus
  • FX was a drag
  • Softness in Germany was offset by positive SSS in UK despite poor traffic during Olympics
  •  EMEA team has embarked on a “Renaissance Plan”, focused on transforming all areas of the business
  • Launched My Starbucks Reward program in select markets

Operating Margin

  • Strong sales and operating efficiency in the U.S.
    • Targeting labor schedules
    • Increased sales leverage over fixed costs
    • Commodity costs didn’t have a material impact on margins in 4Q
  • CAP margins continue to improve on double-digit comps
  • EMEA is targeting mid-teen margins over the longer-term

 

Outlook

  • FY13 EPS expected to be $2.15 versus $2.06 prior
  • 15-20% growth each quarter with 1QFY13 at low end due to leadership conference and Verismo launch
  • Targeting revenue growth in the range of 10-13% with MSD comps and 1300 net new stores
    • Further acceleration in CAP growth
    • 2,000 remodels in FY12 and 2,000 more planned in FY13
  • Verismo will be expanded to pursue the multibillion dollar global opportunity

 

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Howard Penney

Managing Director

 

Rory Green

Analyst