• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

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.

Summary

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

  • 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

  • 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

Europe

  • 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

CPG

  • 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 1q13 recap

 

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

Outlook

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