1Q13 Starbucks comps in the Americas and China, Asia Pacific were impressive and, despite EPS only meeting expectations, the outlook for the company's earnings is positive with many tailwinds coming into play as we move through FY13.





Starbucks posted a solid quarter, albeit with unit growth missing expectations and some weakness in CPG.  Along with unusual items that negatively impacted margin, these factors prevented the strength in comps from flowing through to the bottom line.  We believe that FY13 consensus estimates for SBUX Americas SSS are conservative. and that the positive traction that has been gained in China will become more meaningful, complementing the strategies being executed on in other markets.   The company is laying the foundation for consistent EPS growth over the coming years. 


Below, we go through a quick recap of 1Q13 earnings and, following that, our thoughts on the company’s earnings potential for FY13. 



1Q13 Earnings

  • Revenues came in slightly lower than expected as CPG sales lagged expectations
  • Comps in Americas, CAP ahead of expectations and encouraging commentary on conference call
  • China continues to be a strong market, no impact on traffic from recent dissatisfaction with other western brands
  • Restaurant operating margin was slightly disappointing given the coffee cost tailwind (that is still growing) but unanticipated, unusual costs had a 130 bps impact on consolidated operating margin
  • Opened 212 net new stores globally versus consensus 283



  • Americas comparable sales grew by 7% in the quarter, including over 4% transaction growth
  • Promoted beverages, including the pumpkin spice latte, added more than a point of comp
  • The division saw operating margin contract by 50 bps due to expenses related to the global leadership conference (90 bps), litigation charges (70 bps), and the impact from Sandy (30 bps)
  • 86% more customers signed up for My Starbucks Reward card in 1Q13 vs 1Q12
  • 80 net new units opened in 1Q versus consensus expectations of 126



  • CAP comparable sales grew by an impressive 11%, including 8% transaction growth
  • Sales growth of 20% was reassuring after recent uncertainty in region
  • Holiday promotions performed well, loyalty card adoption rate encouraging across region
  • Unit growth is having a temporary negative impact on op margin – more than 60 bps in 1Q
  • 125 net new units opened in CAP during 1Q.  The Street was anticipating 136



  • EMEA comparable sales declined -1%, including 2% traffic growth.  Check declined, suggesting a trade down impact driven by difficult consumer environment in the region
  • Largest market, the U.K., received the pumpkin spice latte well
  • Operating margin expanded by 110 bps as a result of cost efficiencies and license stores’ revenue growth



  • VIA Ready Brew grew 16% in the quarter
  • 175 million K-Cups sold in the quarter
  • 150,000 Verismo machines sold across each channel since launch
  • Schultz underlined the company’s intention to provide incentives, going forward, for customers “to not only buy Starbucks coffee, but integrate that even further in the Starbucks ecosystem” with the card loyalty and mobile



SBUX COMPS A SIGN OF STRENGTH - sbux americas sss cons


SBUX COMPS A SIGN OF STRENGTH - sbux cap sss cons


SBUX COMPS A SIGN OF STRENGTH - sbux emea sss cons





The company remains well-poised to take further share of the US coffee market while growing its presence internationally.  In our view, this quarter’s revenue shortfall is not indicative of any significant issues within the business.  Initiatives within the CPG business, such as expanding the Blonde Roast offering and introducing new varieties of K-Cups, are set to maintain momentum in the category.  New unit growth, which missed expectations, is likely not a concern for the full-year since management reiterated its guidance of 1,300 net new stores globally (600 Americas, 600 CAP, 100 EMEA).  We are modeling $2.19 in EPS for FY13.


The long-term challenge for Starbucks is going to be maintaining control of its brand through every channel it pushes product.  As we wrote almost two year ago, “the future of the single-serve category is Starbucks’ to shape”.   The tone of today’s call certainly firmed that conviction.  


One risk that is in play during this quarter is the pending Kraft arbitration ruling.  Kraft is reported to be seeking as much as $2.9 billion plus legal fees.  Although no resolution has yet been reached, Starbucks management anticipates a ruling to be delivered later in the second quarter (ending March). 



Howard Penney

Managing Director


Rory Green

Senior Analyst


Today we bought International Game Technology (IGT) at $14.81 a share at 9:37 AM EDT in our Real-Time Alerts. Todd Jordan was back on our Morning Call reviewing the long-term bull case for IGT. Cheap stocks with improving fundamentals are what people have to chase, especially after a solid earnings report.



real-time alerts

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


Chicken wing prices are, like last year, moving sharply higher to start the year.  The difference in 2012 is that prices are moving above $2 per pound for the first time with a possibility of further upside.  We continue to see risk to BWLD’s multiple.





In 2012, during the first 24 days of the year, chicken wing prices gained 14%.  For much of the remainder of last year, prices stayed within a range of roughly 180-190 cents per pound.  Year-to-date in 2013, wing prices are again moving higher: +7.2% YTD.  During the 3Q earnings call, management warned that the price of wings was trending to $2.07 for the first two months of the fourth quarter and stated that they expected it to exceed that level heading into the super bowl. 


The question is whether or not this expectation is baking in the possibility of McDonald’s expanding its testing of wings, currently in being sold in Chicago after a successful run in Atlanta, to its national system.  BWLD’s guidance for earnings growth of 20% seems dependent on a number of factors, one important one being some moderation in wing prices in 2H13, per remarks from CFO Mary Twinen in October.  MCD getting in on the act won’t help that happen.




  • We still believe that BWLD’s multiple needs to reset much lower as earnings move lower
  • Wing prices moderating in 2H13 could be difficult given industry conditions, wing demand, and potential weather impact on corn
  • Moderating wing prices seem to be central to the bull case
  • Selling wings by weight, rather than number, is likely to damage the brand and management knows this
  • The first six weeks of 1Q12 saw co-op SSS increase 12.9%, presenting a difficult compare for the same period in ’13.  If the switch is made to selling wings by weight, that could make comping last year’s strong first quarter even more difficult.




PERFECT TIME TO PANIC AT BWLD - chicken wings 6mo




Howard Penney

Managing Director


Rory Green

Senior Analyst

Hedgeye Best Ideas: Federal Express (FDX)

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We believe FedEx has the ability to improve margins in its Express division.  With a large revenue base at a near 30-year low in margins, the division could be a value driver over the next two years.  Further, we see FedEx Ground as a winner in the US ground parcel market.  That division offers exposure to fast growing e-commerce package volumes.   Finally, FedEx Freight has been surprisingly profitable and may benefit from a rebound in US construction activity.



INTERMEDIATE TERM (the next 3 months or more)

We believe we are past the trough in FedEx Express margins.  Cost improvements are already underway and the macro environment appears likely to be more supportive of express services demand.  Estimates for fiscal 2014 should benefit from that momentum, in our view, and fiscal 4Q 2013 guidance may well be positive at the next report. We view an expanded network in Europe as a positive for FedEx Express, should the FDX end up acquiring TNT at an attractive price.


LONG-TERM (the next 3 years or less)

FedEx is a long-term position, in our view.  Reorganizing the Express division is a slow process, in part because high service levels cannot be disrupted as adjustments are made.  Cost reductions build through FY2016 and the long-run result may surprise to the upside.  FedEx Ground has been taking market share from UPS in US ground parcel for over a decade, but those gains may well reach a tipping point in coming years.  In our view, shares of FDX could offer 50% upside to fair value should the margin expansion at FedEx Express match its competitors'.



Hedgeye Best Ideas: Federal Express (FDX) - he bi FDX chart



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And they played unlucky!



As we wrote about in our Macau preview notes (“MACAU MODEL UPDATES”, 1/6/13 and “MACAU: EXAMINING THE Q4 HOLD IMPACT”, 1/7/13), MPEL should report 4Q EBITDA well above the Street on an actual and hold adjusted basis.  The stock has had a phenomenal run so most of the beat is probably reflected.  However, if we’re right on our adjusted EBITDA projection, full year 2013 consensus needs to go higher as well.


We are projecting that MPEL will report $1,080MM of net revenue and $261MM of EBITDA, 2% and 10% ahead of consensus, respectively.  On a hold adjusted basis (using each property's historical hold rate), our EBITDA estimate goes to $272 million.    





We estimate that City of Dreams will report $772MM of net revenues and $227MM in EBITDA; impressive considering the low hold at the property.

  • Our net casino win projection is $752MM
    • VIP net win of $399MM
      • Assuming 15% direct play, we estimate $22.7BN of RC volume (up 11% YoY) and a hold rate of 2.66%
      • Using CoD’s historical hold rate of 2.91%, EBITDA would be $15MM higher and net revenues would be $53MM higher
    • $312MM of mass win, up 50% YoY.  A record for CoD.  Mass revenues reached a record $118MM in December alone and were also north of $100MM in November based on our estimates.
    • $41MM of slot win
  • $20MM of net non-gaming revenue
    • $24MM of room revenue
    • $16MM of F&B revenue
    • $24MM of retail, entertainment and other revenue
    • $44MMM of promotional allowances or 69% of gross non-gaming revenue or 5.8% of net gaming revenue
  • $433MM of variable operating expenses
    • $373MM of taxes
    • $47MM of gaming promoter commissions in addition to the rebate rate of 90bps (we assume an all-in commission rate of 1.11%)
  • $24MM of non-gaming expenses
  • $87MM of fixed operating expenses up 3% YoY and $2MM QoQ

We project $273MM of net revenues and $43MM in EBITDA for Altira

  • We estimate net casino win $270MM
    • VIP net win of $245MM
      • $11.8BN of RC volume (5% YoY decrease) and a hold rate of 3.01%
      • Using Altira’s historical hold rate from the last 11 quarters of 2.9%, we estimate that EBITDA would be $4MM lower and that net revenues would be $12MM lower
    • $25MM of mass win, flat YoY
  • $3MM of net non gaming revenue
  • $193MM of variable operating expenses
    • $149MM of taxes
    • $41MM of gaming promoter commissions in addition to the rebate rate of 94bps (we assume an all-in commission rate of 1.29%)
  • $3MM of non-gaming expenses
  • $33MM of fixed operating expenses in-line with 3Q

Other stuff:

  • Mocha slots revenue and EBITDA of $36MM and $9MM, respectively
  • D&A:  $94MM (guidance of $90-95MM)
  • Interest expense:  $22MM (guidance of $23-25MM)
  • Corporate expense:  $18MM (guidance of $18-20MM)

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