Yesterday, Starbucks announced that it will acquire the remaining 60.5% share of Starbucks Japan in a two-step tender offer process that should be fully completed in the first half of calendar 2015.
There are two ways to view this transaction.
On one hand, this is good news for shareholders. Japan is a large market for Starbucks accounting for approximately $1.2 billion in revenues, boasts high store-level profit margins (20-25%) and will immediately be accretive to adjusted EPS, although to what extent is unknown. Longer-term, this makes strategic sense as well as it will allow the company to capture the significant growth opportunity left in that region.
One the other hand, however, we believe the timing of the deal confirms our view that growth in the core business is slowing. The company could've done this deal at any time in the past three years, but did not need to given strong sales trends and a significant commodity tailwind. With these trends reversing, expectations for 18% EPS growth in FY15 looked aggressive, at the very least.
On the call last night, management said they would update FY15 guidance when they report earnings in late October. Given the immediate accretion from the deal, 18% EPS growth next year now looks achievable and we suspect they will move guidance from the low-end to the high-end of the 15-20% range. Given aggressive estimates for next year, it is comforting to know that they will, in all likelihood, not be revised higher from here. Another important point is that this acquisition will, for now, help mask the margin decline that the company was facing.
Despite this news, if the core of our thesis is right (same-store sales decelerating, commodity costs increasing), it will have a bigger impact on the stock than this well-timed transaction.
Call or email with questions.
Howard Penney
Managing Director
Fred Masotta
Analyst