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The Week Ahead

The Economic Data calendar for the week of the 2nd of November through the 6th of November is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

The Week Ahead - 10.30.15 Week Ahead


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: TIF, JNK, W, WAB, ZBH, GLD, MCD, RH, LNKD, ZOES, GIS, EDV & TLT

Investing Ideas Newsletter - rate hike cartoon 10.28.2015

It was (another) strong week for our Investing Ideas recommendations.

 

Below are our analysts’ updates on our thirteen current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this. We will send CEO Keith McCullough’s updated levels for each ticker in a separate email. 

IDEAS UPDATES

MCD 

To view our original note on McDonald's click here.

 

Last week was a big week for McDonald’s (MCD), as they reached the inflection point we were predicting. Post earnings, the next catalyst for the stock is going to be the November 10th analyst meeting.

 

The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT.

 

Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.

LNKD

To view our analyst's original report on LinkedIn click here.

 

LinkedIn (LNKD) shares soared approximately 14% this past week (versus a 0.36 decline for the S&P 500) after the company reported strong 3Q results and 4Q guidance coming in ahead of the Street's expectations. 

 

Most notably was an acceleration in organic Talent Solutions growth, which not only vindicates management for its 1Q15 salesforce account transition, but puts to rest concerns that the Lynda acquisition was a decoy for deteriorating core fundamentals.

 

However, we wouldn’t be chasing this print today. The next catalyst on the horizon is its 2016 guidance release in February. We’re not 100% sure we want to stay long into that event simply because this management team is notoriously cautious with its guidance, particularly the initial release.

 

Stay tuned for an update.

WAB

To view our analyst's original note on Wabtec click here.

 

The downcycle in freight rolling stock is just getting started. Wabtec (WAB) pretty much confirmed that on the earnings call last week.

 

For those who have listened to WAB earnings calls since Executive Chairman Albert Neupaver took over, the change in tone is immediately apparent. In generating the sales miss this quarter, WAB actually drained the order backlog, with a book-to-bill of 0.84. The freight book-to-bill was a minor train wreck – worse than what was posted in a quarter during the financial crisis.

 

We continue to expect 2016 EPS to move sub $4.00. This past earnings announcement is only the first minor readjustment.

 

Investing Ideas Newsletter - WAB

W

To view our analyst's original report on Wayfair click here.

 

The common perception with Wayfair (W) is that it is a play on the millennial furnishings shopper. Millennial consumers are defined as the 15-34 age bracket. These shoppers grew up with a smartphone in tow, i.e. they are more comfortable shopping online. Based on the e-commerce visitation trends, however, it doesn’t appear that Wayfair.com has a particular advantage with this subset. 

 

The chart below shows how Wayfair stacks up against Amazon.com and pier1 on weighting of visitation by age and compared to the internet average. Wayfair skews high in the 55 to 65+ demographic, and is right in line with pier1 in the 18 to 34 age range. To get to the 60mm+ household addressable market, Wayfair will have to spend aggressively on ad cost to get eyeballs since it has zero physical presence in this market.

 

Investing Ideas Newsletter - 10 30 2015 W age dist

TIF

To view our analyst's original report on Tiffany click here.

 

The common perception seems to be that “just because Tiffany (TIF) blew up earlier this year, it can’t blow up again.” We disagree. It actually blew up twice this year. And we think there will be another. We didn’t like TIF into the last print, and we definitely don’t like it on the way out. The company lowered back half guidance, which we expected to see, but we’re not sure if $0.10 is enough off of 2H14’s $2.27 base. We’re inclined to think ‘no.'

 

Tiffany's quarter is just ending and ecommerce traffic trends have not looked strong in the quarter. YY Traffic Rank (which measures unique visitation and page visits/user) has deteriorated since mid-August. E-commerce only accounts for 6% of sales at TIF, but it’s a good barometer for brand relevance. And, the trends headed out of 3Q look particularly weak.

 

Investing Ideas Newsletter - 10 30 2015 TIF traffic

RH 

To view our analyst's original report on Restoration Hardware click here.

 

Restoration Hardware (RH) shares gained 5.8% this past week. The margin story here is explosive. Margins are sitting below 10% today, and we think they will be above 16% in 3 years. The key reason is that expense leverage on these new properties is like nothing we’ve ever seen (i.e. RH pays only 10% more for square footage that’s 300% larger).

 

In addition, the company does not have to proportionately grow its sourcing organization with the growth in its store base OR its category expansion. 

 

Our estimate is that the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we’re getting to a stock in excess of $300.

ZBH

To view our analyst's original report on Zimmer Biomet click here. 

 

Zimmer Biomet Holdings (ZBH) reported numbers and calmed the concerns across the Street with positive commentary about 2016 growth. We did not hear any questions from largely bulge bracket sellside firms that called into question the consistent deceleration in their US Knee growth. 

 

Management reported -1.8% growth in America’s knee growth, largely driven by the very small percentage of sales in Latin America seeing substantial declines, and a flat US market. Our view is that ZBH is heading into a very tough operating environment where the tailwinds from the Affordable Care Act wane (#ACATaper) and growth slows materially.

 

Investing Ideas Newsletter - 10 30 2015 knee chart

 

The added headwind of the new Medicare global payment model (CCJR) which will hurt pricing and volume, will only make matters worse. Our view is that $90 was too low for ZBH, declining recently along with the rest of the healthcare equity market, dubbed #Reformaggon stocks. $105 is probably where $ZBH belongs given the deterioration in the fundamentals so far in 2015.

 

However, the reflation in the equity price from a disaster-low is not an “All Clear” signal. It’s an opportunity to re-assess (we still like the short) for both the longs and the shorts. 

 

We’re continuing to speak to surgeons about case volumes and device pricing through the remainder of the year. We’ll continue to update our #ACATaper charts, looking for signs that we remain on course with the thesis.  

 

Click below to view an update from our Healthcare team this week.

Investing Ideas Newsletter - 10 30 2015 HC video

TLT | EDV | GLD | JNK

To view our analyst's original report on Junk Bonds click here

 

You got your chance to buy long-term bonds again at the end of the week as the “rate hike in 2015” was teased yet again from Janet Yellen on Wednesday. Interest rates moved higher on the week and gold was tagged for a loss after reaching week-to-date highs pre-meeting. Bottom Line: The market took the statement as hawkish and the language put global deflation back on the table.

 

Looking at the statements side-by-side, they removed the sentence that “global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term.”

 

Don’t buy the central planner's failed attempt at arresting economic gravity. Let’s dissect an important week of economic data.

Investing Ideas Newsletter - Economic growth cartoon 10.20.215

Our forecasts for domestic economic growth continue to be more accurate than the consensus. We anticipate economic growth will get a lot worse from here. That is why you want to own long-term bonds (TLT, EDV).

  • Real GDP growth slowed to 1.5% on a quarter-over-quarter seasonally adjusted basis. That was actually right at the top end of our range going into it (remember that the mainstream Q/Q annualized number is unpredictable)
  • On the Y/Y numbers, growth decelerated for a 2nd straight quarter to 2.0% from +2.7%
  • Consumption growth was a huge contributor to the number vs. the manufacturing side of the economy which continues to slow. However, take a look at the important chart below. We’re already past peak consumption growth. Consumption growth was positive on an absolute basis but remained rate of change negative with Q3 representing the 2nd quarter of deceleration off of the Q1 2015 peak
  • Both residential and nonresidential Investment decelerated sequentially and inventories contributed almost -1.5% bps to the headline number
  • Personal Income decelerated to +0.1% for Sep vs. +0.3% in August. The expectation was for a +0.2% print
  • Personal spending decelerated to +0.1% from +0.4%. The expectation was also for +0.2% print.
  • Core PCE printed flat at +1.3% Y/Y for Sep. vs. Aug. on a Y/Y basis. That number missed expectations for a +1.4% print

Investing Ideas Newsletter - 10.30.15 Consumption Growth

GIS

General Mills (GIS) continues to be one of our top ideas in the Consumer Staples sector. Sector head Howard Penney loves the name for its characteristics during the current macro driven market. Big-cap, low-beta, and their line of sight at growing the top line in a meaningful way, are contributors to our LONG thesis.

 

There has not been much notable news on GIS as of late. This week they did provide an update, as part of a previously announced project, that they will be closing manufacturing facilities in the UK and New Zealand. If completed these actions will eliminate 285 positions and incur restructuring charges of $47 million to $52 million. Management expects these actions to be completed by the end of FY2017.

 

Again, this was a pre-announced project so it was only a matter of time until this actually hit the newswire. GIS pruning its manufacturing footprint is a critical step in their effort to become more nimble globally. 

ZOES 

Nothing has changed at Zoës Kitchen (ZOES). We still love the management team and the concept of the restaurant. But due to the macro-driven market, high beta, low-cap names such as ZOES have fallen out of favor.

 

If you are a "buy and hold" type of investor this is a name you want to be in for the long run, especially at these values. This company has a long runway of growth which we believe is only just in the beginning stages. 


Cartoon of the Day: Zombie Economy

Cartoon of the Day: Zombie Economy - Economic growth cartoon 10.20.215

 

Are you prepared for a deepening of the global earnings and industrial recessions? Hedgeye Macro analysts Christian Drake and Darius Dale sent a detailed note to institutional subscribers on Thursday afternoon laying out our #SlowerForLonger (growth) thesis. Here's the key takeaway:

 

"Our forecasts for domestic economic growth continue to be proven most accurate and we continue to anticipate things will get a lot worse from here."

 

 


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HEDGEYE Exchange Tracker | Comping the Comp

Takeaway: 2 of 3 categories remain in contraction Y/Y although we expect futures to turn to positive territory soon as the Grexit marked last October.

Weekly Activity Wrap Up

All three categories remain in negative growth territory Q/Q, although cash equities, with a 7.1 billion 4Q15TD ADV, are positive Y/Y at +2%. Options activity is averaging 16.5 million contracts per day so far in the quarter, a -5% contraction year-over-year and a -9% contraction versus 3Q15. Futures had their best week so far this quarter, coming in with 19.4 million contracts per day, however, the 17.5 million 4Q15TD ADV is -6% lower than last quarter and -9% lower than 4Q14. In October of last year, the potential Greek exit from the European Union drove outsized activity which will have normalized by mid-November. We expect both ICE and CME to have better comps at that point and think that CME especially will finish 2015 strongly (see our most recent CME note here).

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 1

 

U.S. Cash Equity Detail

U.S. cash equity trading came in at 7.4 billion shares traded per day this week. That brings the fourth quarter average to 7.1 billion shares traded per day, a +2% Y/Y expansion but -3% Q/Q contraction. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of fourth-quarter volume, a +3% year-over-year increase, while NASDAQ is taking a 19% share, a -8% year-over-year decline.

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 2

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 3

 

U.S. Options Detail

U.S. options activity came in at a 17.1 million ADV this week, bringing the 4Q15TD average to 16.5 million, a -5% Y/Y and -9% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -9% of its share year-over-year settling at just 18% of options trading currently. Additionally, CBOE's market share has been falling recently and now sits at 26%, -14% lower than 4Q14. NASDAQ, on the other hand, is starting the quarter strongly, increasing its market share by +13% compared to 3Q15, bringing itself only -2% lower than the 24% share it held a year ago. BATS' share has been falling recently but at 8% in 4Q15TD it remains +27% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +10% Y/Y growth.

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 4

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 5

 

U.S. Futures Detail

CME Group volume came in this week at 14.1 million contracts per day and is averaging 12.8 million for the fourth quarter, a -14% Y/Y and -11% Q/Q contraction. However, CME open interest, the most important beacon of forward activity, currently tallies 101.7 million CME contracts pending, good for +9% growth over the 93.7 million pending at the end of 4Q14, an expansion from the prior week's +7%.

 

ICE had its best week so far in 4Q15TD with 5.3 million contracts traded per day. Additionally, at 4.7 million contracts traded per day in 4Q15TD, activity has grown +7% Y/Y and +10% Q/Q. ICE open interest this week tallied 67.5 million contracts, a +14% expansion versus the 59.4 million contracts open at the end of 4Q14, consistent with the prior week.

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 6

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 8

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 7

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 9 

 

Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 10

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 11

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 12

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 13

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 14

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 15

 

Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon19 3

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


Join Hedgeye For Holiday Cocktails & Appetizers

'Tis the Season…. We hope you can join us at La Biblioteca (622 3rd Avenue at 40th Street – located inside Zengo restaurant) on Wednesday December 9th, from 5-9pm for some holiday cheer!

 

Please RSVP to Kerrie at  if you can join.

 

We look forward to seeing you!

 

-Your Hedgeye Macro Team

 

Join Hedgeye For Holiday Cocktails & Appetizers - he client holiday party DEC2015


SBUX | WHAT WILL SLOW THEM DOWN? | CONFERENCE CALL NOTES

HEDGEYE COMMENTARY

SBUX is a juggernaut! 

 

The company reported a very strong end to FY15 quarter and looks like FY2016 will be another strong year.  In the US, food sales are accelerating and Mobil Order & Pay is driving incremental transactions.  Globally, the company is growing same-store sales and adding more stores to the base.  

 

The bar was set high coming into this quarter and now has been set even higher going into 1Q16.  Despite the company providing EPS guidance slightly below street estimates, the trend in transaction growth, which is the most important metric, points to continuing growth.

 

The quote by CEO Howard Schultz says it all “Starbucks occupies a front-row seat at the intersection of the physical and digital worlds like no other company anywhere in or out of retail.”  Mobile Order & Pay is the key to driving future growth at SBUX.  On the other side of the coin, I do not believe that the trends we are seeing in food sales have long-term sustainability.   

 

Currently the stock is trading at 18.13x EV/NTM EBITDA, which puts SBUX at a significant premium to its global peer group.  While it may deserve the premium, the stock is priced for perfection and nothing lasts forever. 

SBUX | WHAT WILL SLOW THEM DOWN? | CONFERENCE CALL NOTES  - CHART 1

 

4Q15 CALL - MANAGEMENT COMMENTARY

  • GLOBAL COMP STORE SALES - Starbucks same-store sales increases of 8% globally, 9% in the U.S., a 4% increase in global traffic. 4Q15 represented the 23rd consecutive quarter of global comp store sales growth of 5% or more. The company served over 72mm more customer occasions from our global comp store base than we did the year before
  • REVENUES AND EPS - 4Q15 reported revenues of $4.9B and non-GAAP EPS of $0.43 FY15 revenues of $19.2B and non-GAAP EPS of $1.58

 

STRATEGIES

  • Partners - And the investments we make in our partners pay tangible dividends in the form of more satisfied and engaged partners, deeper connections among partners, and with customers and improved in-store efficiency, all of which contribute to an elevated in-store Starbucks experience for everyone, partners and customers alike.  Noteworthy is that today we are seeing improvements in partner attrition, a direct result of our partner investments at a time when the industry overall is actually moving in the opposite direction
  • Our comp results are strongest where we are having our greatest success in reducing turnover
  • And our newest class of stores is performing at the highest level in our history, generating first-year average unit volumes of $1.4mm, up nearly 20% from only three years ago, while also delivering record profitability and returns on investment
  • At the same time, we continue to open new Starbucks stores and introduce dynamic new best-of-class store designs and formats like our express stores and drive-thrus, while meaningfully growing comps and without any net cannibalization of existing Starbucks stores operating in the same trading area
  • Starbucks occupies a front-row seat at the intersection of the physical and digital worlds like no other company anywhere in or out of retail

 

PARTNERSHIPS

  • The partnerships we’ve recently announced with The New York Times, Spotify and Lyft are the first of many partnerships that will enable us to increasingly leverage and monetize the platform and our other technology investments
  • Through these investments and the best-of-class mobile and digital experience that Starbucks delivers, we believe that we are building an unassailable position that will only strengthen and become more relevant as today’s increasingly mobile-first consumer economy evolves

 

NEXT-GENERATION OF FEATURES AND MOBILE PAYMENT

  • But despite our industry-leading position in mobile and digital today, we are continuing to push the envelope and now have line of sight on the next-generation of features to excite and delight our customers and our partners
  • Mobile payment now accounts for 21% of all transactions in our U.S. company-owned stores, and although we only completed the rollout of Mobile Order & Pay across our system 7500 U.S. company-owned store portfolio in September, we were already operating at a run rate of over five million transactions per month
  • We have seen the pattern of accelerated adoption of Mobile Order & Pay with each successive region and market we enter play out over and over again.  And I’m pleased to report that we are seeing it again in terms of this pattern, accelerated adoption, repeat in the early days of our recent international launches of Mobile Order & Pay in both the U.K. and Canada
  • My Starbucks Rewards Program
  • Membership in our fast growing and industry-leading My Starbucks Rewards program, our loyalty program, continues to grow, and we now have over 20mm members in countries around the world
  • And two weeks ago, we launched delivery in the Empire State Building to favorable customer and media response, and we’ll be launching delivery in Seattle in conjunction with Postmates later this quarter
  • We have begun deployment in 150 stores in the U.K. and more than 300 stores in Canada, while framing plans to continue rolling out Mobile Order & Pay in key markets around the globe
  • We launched the Starbucks mobile app, both the iOS and Android versions in France and Germany
  • We’re on track to deploy in Poland, Czech Republic, and Kuwait this year

 

Kevin R. Johnson, President and Chief Operating Officer, Starbucks Corp.

OPERATING HIGHLIGHTS

REVENUES, BEVERAGE PROGRAM AND SALES

  • Americas posting 4Q15 same-store sales of 9% and revenues growth of 11%.  In Fy15 it opened 612 net new stores over.  “Our beverage program, fueled by innovation such as our new Cold Brew and strong core beverage performance, drove six points of comp growth and delivered increased food attach rates.
  • Sales of iced beverages, including Teavana Shaken Iced Teas, grew 20% YoY
  • And our limited-time offering line-up with the new and improved Pumpkin Spice Latte, Salted Caramel Latte, and Toasted Graham Latte performed well ahead of our initial expectations
  • FY2015 Teavana branded tea beverages generated nearly $1B of sales through Starbucks stores in the U.S., up 12% over last year
  • And we will be bringing Teavana branded, handcrafted tea beverages to CAP and EMEA in FY2016
  • Food revenue grew 19% in the quarter, contributing three points of comp growth, including attach
  • Our breakfast sandwich platform, which has now doubled in size from just three years ago, is increasingly resonating with our customers, and our lunch program is accelerating
  • You may recall that last year, one in seven Americans received a Starbucks Gift Card over the holidays, generating over $1.6B in card loads in our Q1 FY2015This year, we’ve reimagined our card mall, expanded the program to include all U.S. company operated stores, and we’re introducing a limited offering of premium cards We’re also bringing back the opportunity for customers to win something that isn’t for sale: Starbucks for Life
  • Noteworthy is that total card loads in the U.S. and Canada, including reloads and activations, in FY2015 totaled $5.1B, up 19% year-on-year

 

CHINA ASIA-PACIFIC SEGMENT

  • China Asia-Pacific segment delivered comp growth of 6%, driven entirely by increased traffic, with revenue growing 110% or 18% excluding the impact of approximately $287mm from the ownership change in Starbucks Japan and negative impact of FX.  Operating income grew 25%
  • Store growth continues with 838 net new stores in FY2015.  The new class of company-operated stores in CAP is outperforming the prior class, generating record AUVs and profit, results that demonstrate the accelerating strength and relevance of the Starbucks brand across the region.
  • There are now over 1,800 stores in 95 cities throughout China
  • There are over eight million MSR customers in China, giving confidence to having 3,500 stores in China by the year 2019
  • Traffic growth in China continues to outpace CAP segment traffic growth overall. 
  • Traffic comps in China accelerate throughout the quarter with continued strong momentum into October
  • Japan delivering another solid quarter of comp sales growth
  • And now with full ownership, SBUX will accelerate growth and leverage all mobile and digital capabilities
  • Company operated stores we acquired in Japan last year will be included in the global and CAP comp basis during Q1 FY2016

 

EMEA’s

  • Excluding approximately $40mm of FX headwinds and the transfer of 41 stores from company-owned to licensed, EMEA revenues increased approximately 8% in Q4
  • Every major EMEA market posted positive comps in Q4, with the U.K., France, and Germany posting particularly strong comp growth
  • Comparable store sales in EMEA grew 5% despite ongoing macroeconomic challenges in several markets in the region with a 3% increase in traffic, representing EMEA’s 10 consecutive quarter of positive comp growth
  • EMEA licensed markets are continuing to perform exceptionally well, with Turkey and the Middle East in particular continuing to outperform, further supporting our license-focused growth strategy
  • By Q4, nearly 69% of our 2,362 EMEA stores were licensed, up from only 54% four years ago
  • EMEA delivered 37% increase in operating income over Q4 last year

 

CHANNEL DEVELOPMENT REVENUE GROWTH

  • Channel Development Q4 revenues grew 14% over last year to $457mm
  • Continued competitive pressures in at-home coffee categories
  • Pleased with the strength of packaged coffee sales in the quarter, which combined with K-Cup sales were the primary drivers of Channel Development revenue growth?
  • Total K-Cup portfolio continues to gain share despite increased pricing pressure and additional new market entrants
  • Starbucks is now the share leader in both premium roast and ground and the entire K-Cup segment for Q1 ever
  • Stars down-the-aisle loyalty program driving incremental purchases of roast and ground in FY2016, and expanding the Stars program to include select Starbucks K-Cup SKUs
  • Foodservice saw 8% revenue growth YoY
  • Internationally, we’re seeing strong growth in the China Asia Pacific ready-to-drink sales
  • On track to launch ready-to-drink through grocery and convenience store channels in 10 Latin American markets with our long-term business partner, PepsiCo, in 2016

 

MSR CUSTOMER

  • This quarter the active MSR customer base in the U.S. increased by 28% year-on-year and active mobile users in the U.S. and Canada has grown 32% year-on-year
  • Mobile payments in October represented over 21% of U.S. tender
  • Launching Delivery Pilots in New York City and Seattle
  • In the coming weeks, going to launch a rich digital music experience, both in-store and out of store, integrated in our mobile app through our partnership with Spotify

 

Scott Harlan Maw Executive Vice President and Chief Financial Officer, Starbucks Corp.

FINANCIAL HIGHLIGHTS

  • GAAP operating margin in Q4 was 19.7% and non-GAAP operating margin was 20%, up nicely from Q3, but down 50BPS from Q4 of last year, due to the impact of partner and digital investments and the change in ownership of Starbucks Japan, partially offset by sales and cost of goods sold leverage
  • In Q4, Americas’ operating income increased 13% y-over-y to $840mm – $841mm on an 11% increase in revenues to $3.4B.
  • Americas operating margin expanded 40BPS to 24.8%
  • Strong sales leverage resulting from a 9% increase in U.S. comps was the primary driver of the margin expansion, more than offsetting approximately 160BPS of impact related to increased partner and digital investments in Q4
  • GAAP operating income in our CAP segment reached a record $130mm in Q4, a full 25% increase over the prior year
  • CAP GAAP operating margin declined to 19.9% from 33.5%, primarily due to the impact of the ownership change in Starbucks Japan
  • Excluding the 15.5 percentage points of financial impact from the ownership change in Starbucks Japan, CAP’s operating margin increased by 190BPS, driven primarily by operating savings in the region
  • EMEA results in Q4 were particularly strong, once again demonstrating increasing momentum in the business and continued progress against our plan to significantly improve segment profitability over time
  • EMEA achieved record operating income for the quarter, and when excluding unfavorable FX impact of nearly $5mm, EMEA operating income increased by almost 50% y-over-y to $58mm
  • And EMEA’s Q4 operating margin of 17.2% exceeded expectations and marked the segment’s fifth consecutive quarter of double-digit operating margin
  • EMEA’s 510 basis point improvement in operating margin in Q4 over the prior year was driven primarily by sales leverage, including the impact of our ongoing portfolio shift to more licensed stores and gains on the sales of certain assets
  • Channel Development grew operating income of 15% over the prior year in Q4 to $197mm
  • Operating margin totaled 43.2%, a 20 basis point increase over the same quarter last year, reflecting a significant increase in income from our North America coffee partnership with PepsiCo and improved cost of goods sold efficiency, primarily offset by higher coffee costs and marketing costs
  • The effective tax rate for Q4 2015 reflects an incremental tax benefit related to certain additional domestic manufacturing deductions to be claimed in our U.S. consolidated tax returns These deductions are retroactive to fiscal-year 2010 and lowered our tax rate for Q4 of 2015 by 7.3% relative to Q4 of 2014, resulting in a GAAP effective tax rate of 27.2% for the quarter
  • FX negatively impacted both Starbucks’ revenue and non-GAAP EPS growth by roughly 3 percentage points in Q4 and 2 percentage points for the full year
  • In FY2015, returned a record $2.4B of cash to shareholders through a combination of dividends and share buybacks, up over 50% from 2014 levels
  • The board has approved a 25% increase in our quarterly dividend to $0.20 per share
  • After adjusting to reflect the change in ownership of Starbucks Japan, our return on invested capital increased over 200BPS in 2015

 

GUIDENCE

  • Consistent with our long-term goals, expect 10% or greater revenue growth on a 52-week basis with the 53rd week adding approximately two points to this growth
  • expecting 2016 global comp growth to be somewhat above our long-term mid-single-digit guidance range
  • Consolidated operating margin will increase slightly from 2015 on both GAAP and non-GAAP bases, reflecting strong revenue growth, sales leverage and increased operating efficiency and performance, partially offset by the impact of increased partner and business investments
  • Expect to see our operating margin in the Americas increase moderately above 2015, reflecting strong sales and COGS leverage, offset by the impact of our investments
  • Expect to see flat to slightly down operating margins in CAP from 2015 levels as increasing sales levels in China, Japan and across the region is offset by the last bit of impact from the acquisition of Starbucks Japan and the continuing impact of negative FX headwinds
  • Q1 CAP margin is expected to be lower by several points than Q1 of 2015, primarily due to lapping the impact of the change in our ownership of Starbucks Japan and the negative impact of FX.
  • FY2016 expect CAP comps to land in the mid-single digits, including the impact of adding over 1,000 stores in Japan into the calculation
  • And projected revenue growth in CAP will be in the mid-teens, reflecting excellent growth in all of our major markets and a small benefit from the change in Japan ownership, partially offset by ongoing FX headwinds
  • Expect our operating margin in EMEA to approach 15% for the year, as we continue to realize the benefits of increased momentum in key markets, strong execution by the team, and the ongoing business model shift from company-owned to licensed stores
  • And sales leverage will drive moderate margin expansion in our Channel Development segment, though less than the very strong 180 basis point expansion we saw in 2015
  • Expect GAAP EPS in the range of $1.84 to $1.86 and non-GAAP EPS in the range of $1.87 to $1.89, including the 53rd week we will report on in Q4 2016
  • the 53 week adds approximately $0.06 to our 2016 EPS estimate
  • Our expectations of comp growth being somewhat above mid-single digits is factored in to our 2016 EPS estimate
  • Expect the y-over-y increase in global partner and digital investments in 2016 will be between $100mm and $125mm, impacting our EPS growth rate by approximately 3 points
  • Our total global investment in these areas in 2016 will land between $250mm and $275mm, compared to approximately $145mm in FY2015
  • The majority of the 2016 initiatives will be in the U.S., but will also include global investments in certain increased partner benefits, digital and technology investments, and G&A costs
  • FX is expected to impact revenue growth by 1 percentage point and EPS growth by 2 percentage points
  • Commodities impact is slightly favorable for the year, now with over 90% of our 2016 coffee costs locked
  • And finally, our effective tax rate for 2016 will be between 34% and 35%
  • Given all these inputs, when adjusting our 2016 non-GAAP EPS range for the extra week by subtracting the $0.06, our growth rate vs. 2015 non-GAAP EPS of $1.58, will be at or slightly above 15%
  • For Q1, 2016 we are targeting GAAP EPS in the range of $0.43 to $0.44 and non-GAAP EPS of $0.44 to $0.45, representing a lower growth rate than the full year as significant FX headwinds in Q1 of 2016 will impact non-GAAP EPS growth by four full points
  • Given Q1, 2016 growth rate, we expect non-GAAP EPS growth in the remaining three quarters of 2016 to be in the middle of our long-term guidance range
  • Contributing to our revenue growth in FY2016 will be the addition of approximately 1,800 net new stores globally
  • In 2016, 70% of our net new stores will be outside of the U.S. with the entire Americas segment accounting for a total of 700 stores, split roughly evenly between company-owned and licensed
  • Our China/Asia Pacific segment will drive roughly half of our new store growth with 900 net new stores, two-thirds of which will be licensed
  • And our EMEA segment is targeting 200 net new stores in FY2016, virtually all of which will be licensed
  • Finally, CapExs in FY2016 are expected to be approximately $1.4B.
  • In 2016, Starbucks will deliver approximately $21B in revenue, operate close to 25,000 stores, and generate an operating margin approaching 20%

 

IMPORTANT COMMENTS FROM Q&A

“And I think if you go back a year ago, we were at 5% and 1%. And if you look at 9% and 4% in the U.S. and what we’ve done sequentially throughout the year and you couple that with the inherent momentum and attachment that we’re seeing from mobile payment, Mobile Order & Pay, and specifically the integration, as Kevin talked about, and the attachment of loyalty, we have enough visibility in the business to be transparent with you that we believe that we’re going to see some incrementality in our overall comp.”

 

“we’re seeing incremental transactions from Mobile Order & Pay, particularly in our busiest stores. We’re pleased with the results across all the tiers of our stores. You know, ticket right now is holding steady and is doing quite well consistent with our other MSR ticket, and we haven’t even added the feature of suggested selling and suggested pairing, which we’re going to do in H1. So, we expect to see that increase on top of the incremental transactions that we’re seeing.”

 

“In fact, if you look at the comps, three points of our comp growth came from food. Our breakfast sandwich business has doubled in the past three years. Lunch is accelerating.”

 

“We now have evenings program deployed in 100 stores, so it’s early days on evenings, but we’ve seen growth in every day part as a result.”

 

“On the beverage side, that accounted for 6% – six points of comp growth.”

 

“We know that MSR customers on average spend three times as much as non-MSR customers, and we’ve grown the number of active MSR customers by 28% year-on-year.”

 

“let me just be very clear that our business in China and across CAP remains very, very strong. We’ve seen no systemic slowdown in our business in China. In addition, what we saw during the quarter was that comps actually accelerated month to month. And in China, we see that comps are continuing to accelerate into the month of October”

 

“And when you break down the total growth across CAP and really across China, 75% of our revenue growth is being driven by new stores, 25% is being driven by comp, and what we continue to do is focus”

 

“The strength of breakfast sandwiches, as Kevin mentioned earlier, we’ve seen that business double over the last three years.”

 

“We’ve seen food grow through that 3% comp to 20% of the mix in U.S. stores, and we see that increasing over time to the mid-20%s, but obviously beverage will still drive it. And we’ll just keep investing, keep learning, and keep growing it.”

 

“Mobile payment is not going to become obsolete. Although mobile ordering is a form of mobile payment and we are going to see a significant number of transactions morph over.”

 

“In terms of data on percent of transactions or percent of tender that’s Mobile Order & Pay, since we just finished the rollout in the U.S. late in the quarter, we don’t have a full run-rate of quarter, so we’re still watching that advance. I think Adam gave you some color on some of the locations that are seeing high usage of that. But each wave of deployment we have made has been adopted faster than the prior wave.”

 

“This is Adam. Howard mentioned that we’re seeing a five million mobile order per month run-rate already. And while we’re not breaking out specific percentages, there is a range of mobile order numbers across a number of store tiers particularly in our busiest tiers and we are seeing significantly more incremental transactions, incrementality in our busiest stores. We are seeing, internationally, our latest wave that went out for Canada and U.K. saw even a faster adoption than the New York wave, which was faster than the previous wave. So we’re getting better at getting faster customer adoption and it bodes well for Mobile Order & Pay globally.”

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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