SBUX STILL TOP DOG

Starbucks is the best-run company that we follow and the long-term TAIL seems unlimited. The company’s geographical reach and size is highly impressive. Even more impressive is the performance of the Americas business, given its size and maturity.

We maintain a positive view of Starbucks as an effective way to play improving US consumption.  While sell-side analysts this morning are correct that the global macro outlook is challenging, it is important to know where SBUX has its exposure.  The U.S. is what will drive beats and misses in the near term, despite much unit growth being focused in China/Asia-Pacific. ~88% of company stores and ~85% of licensed stores within the "Americas" division are located in the United States.

SBUX STILL TOP DOG - yum mcd sbux opinc

The Good

Last night, Starbucks reported global same-store sales growth of 6% (13th consecutive quarter above 5%).  Same-stores sales in the Americas division grew 6% (including 5% traffic). Total revenue growth of 11% produced a 180 bps increase in operating margin and a 20% increase in EPS. 

Americas:

  • Revenues + 10% yy
  • SRS two-yr comp sequentially declined 100 bps
  • Operating Income +22%
  • Operating Margin +220 bps to 21.1% (highest 2Q ever)

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EMEA:

  • Revenues unch’d, operating margin unch’d
  • -2% 2QFY13 comps implies 2-yr  comps negative
  • Emphasis is on improving profitability by refranchising (“sold to you!”)
  • Applying Americas “learnings” not trumping macro

SBUX STILL TOP DOG - sbux emea pod1

CAP:

  • Revenues grew 22%
  • Comps at +8% came in light vs consensus
  • Operating margin down -710 bps on investment spending on China growth

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The Less-Good: Expectations, Food

The only slight negative stemming from what was, overall, a bullish conference call was management reigning in expectations for 2H13, but upping the official guidance. During the call management guided for 3QFY13 EPS of $0.50-0.53 and 4QFY13 EPS of $0.54-0.57, versus consensus of $0.54 and $0.57, respectively. The coffee cost tailwinds should continue well into FY15 now, offsetting continued investments in growth-related initiatives. 

Food remains Starbucks’ Achilles’ heel.  The acquisition of La Boulange is a long way from being branded a “success”.  As of yesterday, there were 439 stores carrying La Boulange products, including all stores in the San Francisco Bay Area.  The company is planning a rollout of La Boulange pastries in the Pacific Northwest including Seattle in June, then will expand to cities including Los Angeles and Chicago, followed later in the year by New York and Boston. The company is on track to have La Boulange products in all of our U.S. company operated stores by the end of 2014.

Howard Penney

Managing Director

Rory Green

Senior Analyst