SBUX: Closing Best Idea Short

With this note, we are removing short SBUX from our Best Ideas list.

 

We try our best to be disciplined with all of our calls, both long and short.  In regards to Starbucks, there was enough good news in 1Q15 to make our short thesis look stale.  While we still contend that the food strategy will be less than successful over the long-term, it likely won’t be enough to cause a disruption in the business.  In addition, the apparent success of Mobile Order & Pay could be enough to reaccelerate traffic trends as the year progresses and, after guiding to a 2Q15 miss relative to expectations and holding full-year guidance, it will need to.

 

SBUX is a great company, which made it a difficult short from the very beginning.  With that being said, we would not be buying it at these levels and will continue to look for evidence of a continued slowdown in underlying traffic trends.  While we wouldn’t be surprised to see our core thesis play out, right now it appears Mobile Order & Pay could allay these concerns.

 

1Q15 UPSHOT

Starbucks reported solid 1Q15 results after the close yesterday, with revenues and earnings falling in-line with cautious, and lowered, analyst estimates.  Heading into the release, we had serious reservations about a hyped-up holiday season which were proven to be misguided.  Our largest concern over the past several months has been the rapid deceleration of traffic growth in the domestic market, which coincided with menu proliferation and the national rollout of La Boulange.  However, a sequential acceleration to 2% traffic growth temporarily allays these concerns – even though we did not see a similar acceleration in the underlying two-year trend.

 

SBUX: Closing Best Idea Short - 1

 

FY15 Guidance

Despite guiding down 2Q15 estimates from $0.68 to $0.64-0.65, management contends that second half sales momentum and some margin favorability (cost of sales and G&A leverage) will allow them to deliver full-year EPS in the $3.09-3.13 range. 

 

Regional Results

Consolidated

  • Comps +5.0% vs +4.7% estimate
  • Revenues +13% to $4.8bn
  • Adjusted EPS +13% to $0.80
  • Operating Margin -10 bps y/y to 19.1%

Americas

  • Comps +5.0% vs +4.8% estimate
  • Revenues +10% to $3.4bn
  • Operating Income +12% to $817.5mm
  • Operating Margin +50 bps y/y to 24.3%

EMEA

  • Comps +4.0% vs +3.5% estimate
  • Revenues (2)% to $333.3mm
  • Operating Income +49% to $50.0mm
  • Operating Margin +510 bps y/y to 15.0%

CAP

  • Comps +8% vs +5.9% estimate
  • Revenues +86% to $495.8mm
  • Operating Income +34% to $108.3mm
  • Operating Margin (860) bps y/y to 21.8%

 

SBUX: Closing Best Idea Short - 2

 

Alstead Out, Johnson In

Management bid farewell to former COO Troy Alstead, while subsequently announcing that current Starbucks board member Kevin Johnson will assume the vacant position.  Schultz noted that, while Johnson’s responsibilities will mirror Alstead’s, he will be more heavily involved on the digital side of the business than his predecessor.  Johnson formerly served as a President at Microsoft and, more recently, as CEO of Juniper Networks.  While he doesn’t have much experience in the restaurant space, he has served on Starbucks board of directors since 2008 and is an influential figure in the organization.  Though we could be mistaken, it doesn’t seem likely that Alstead will return to the company.

 

The Good

  • Revenue, earnings in-line
  • Comps beat estimates across the board
  • Domestic traffic accelerated sequentially to 2%
  • Food contributed 2% to the comp
  • Strong holiday period evidenced by comp acceleration throughout the quarter
  • New holiday seasonal beverage, Chestnut Praline Latte, was a very successful LTO
  • Digital, loyal, card, and mobile all contributed meaningfully in the quarter (one in seven American adults received a Starbucks gift card this holiday; $1.6 billion loaded on Starbucks cards in North America; 13 million customers entered the Starbucks for Life sweepstake; over 9 million MSR members)
  • Rolling out Mobile Order & Pay nationwide in 2015
  • Continue to invest in smaller, alternative store footprints
  • EMEA continues to recover
  • CAP performed well; China comps stronger than region as a whole; Japan immediately accretive to EPS
  • Confident in ability to leverage cost of sales and G&A expenses throughout the year

 

The Bad

  • Domestic two-year average same-store sales decelerated 150 bps sequentially
  • Domestic two-year average traffic remained flat on a sequential basis
  • Guided down 2Q15 earnings by a few pennies and maintained full-year guidance, putting more pressure on 2H15
  • Consolidated operating margin of 19.1% fell 10 bps short of expectations

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