Starbucks (NASDAQ: SBUX) reported its second quarter earnings on April 24, 2014. Shares of the company are up 0.51 percent or $0.36 per share to $71.45. Below are some key takeaways from its conference call:
Howard Schultz, Chairman, President and CEO:
• Over the last several years, we have further honed our best-in-class retail site selection, store development and design and construction expertise.
• The best evidence of that fact is the tremendous success of our new store class. Sales to investment ratios of over 2 to 1, REIs - or return on investments in excess of 50% and first-year average unit volumes of over $1.2 million, all while delivering an enhanced experience to our customers.
• Several years ago, we saw an opportunity to reinvent the traditional QSR drive-through format, and as a result, our new class of drive-through stores are providing Starbucks with a unique ability to connect with the increasing numbers of our customers on the go.
• We are leveraging our drive-through store portfolio to provide further incrementality and add another new runway for growth that is strategically complementary to our high-profile urban street-front locations.
• Despite currently operating over 20,000 Starbucks stores in 64 countries, our research clearly demonstrates that Starbucks still accounts for a very small share of total global coffee occasions and that we are significantly under-stored in many markets, including North America, China, Brazil and India, today our fastest-growing international market.
• Turning to coffee and tea, coffee will always be at our core and we are making significant investments across our business, including building our supply chain capabilities and elevating and operating standards to ensure that we continue to innovate and provide global thought leadership and undisputed authority in coffee-quality sourcing and roasting.
Troy Alstead, COO
• Our record second quarter was the outcome of a continued strong effort of each four reporting segments. Our business remained extremely healthy and poised for continued growth with all retail regions growing revenue at rates faster than industry and the Channel Development business just beginning the top line acceleration.
• I'll spend the next few minutes discussing the performance of these businesses, then we'll turn it over to Scott for a discussion of our consolidated results, segment margins and our outlook for the balance of the year. Let me start with the Americas segment, which delivered another quarter of solid results in a persistently difficult retail environment.
• Total net revenues in the Americas grew $2.8 billion in Q2, up 8% over the prior year. The largest driver of our revenue increase was the strong comp growth of 6%, with 3% coming from ticket growth and increase traffic contributing 2%.
• La Boulange has significantly improved the quality of our bakery offerings and now in 6,000 U.S. company-operated stores and another 2,500 licensed stores, it's driving results as well, helping the food category contribute two points of comp growth in the second quarter.
• Additionally, we're just beginning to leverage our vast My Starbucks Rewards member base to deliver meaningful marketing and promotions to the right person at the right time. While the absolute number of offers we're sending is increasing, each one is going to smaller, more precisely segmented sets of members.
• Moving now to EMEA where our momentum continues to build each quarter. Q2 was outstanding in every way, in what is our seasonally softest quarter for revenue growth at its highest rate in two years, comp growth at its highest in three years and profitability more than tripling over last Q2.
• Revenue growth in EMEA up 13% to $310 million was a function of favorable foreign currency exchange, strong comp growth and strong licensed store growth. Comp over 6% was driven by a 5% lift in transactions and a 1% rise in average ticket. We continue to show strong improvement across the region, especially in the UK, where our deep focus on operational excellence continues and results are very evident, especially during the morning peak.
Scott Maw, CFO
• I'm pleased to join you on my first quarterly earnings call as a CFO. It was an outstanding quarter as our global operations continued to produce record-breaking results.
• We delivered comp growth in the heart of our target range. We over-delivered against our earnings per share target. We also set Q2 records for revenue, earnings, operating margin and operating cash flow. And we returned nearly $0.5 billion to shareholders through dividends and share repurchases.
• At the same time, we invested back into the business, including the addition of 335 net new stores globally and by introducing La Boulange to over 3,300 U.S. company-operated and licensed stores.
• It's important to note that many of our metrics were impacted by unprecedented store closures and other disruption from severe weather in the U.S. With that said, the 6% total company comp number was still very much in line with our targets. We also saw excellent balance globally in our comp growth with two regions at 6% and one at 7%.
• In addition to amounts available under our credit facility, we have $1.2 billion of cash and cash equivalents at the end of the quarter. Q2 operating cash flow was $418 million, up 37% from last year, driven by strong business unit performance and ongoing working capital efficiencies. • Specific to the third quarter, we continue to target EPS in the range of $0.64 to $0.66, and with better visibility into our business outlook for Q4, we are now targeting EPS in the range of $0.71 to $0.75.
Growth:
• Schultz: I'm very pleased to comment on the record second quarter results that Starbucks announced today and to provide detail around several exciting new initiatives we have underway.
• Schultz: Record revenues combined with reduced operating costs to drive a 130-basis point increase in consolidated operating margin to 16.6%, enabling us to deliver an 18.4% or $100 million increase in operating income to $644 million, and a 17% increase in earnings per share, after excluding last year's non-recurring gain to a Q2 record of $0.56 per share.
• Schultz: Q1's momentum continued in Q2, with each of our retail segments around the world contributing positively to global comp store sales increase of 6%, representing our 17th consecutive quarter of comp growth of 5% or greater and record Q2 revenues of $3.9 billion. Particularly noteworthy was a 7% comp increase delivered by our China and Asia-Pacific segment and the 6% comp increase delivered by our EMEA segment, the strongest comp growth in EMEA in 14 quarters.
• Schultz: EMEA's performance in Q2 provides powerful evidence of the success of our continuing efforts to transform that important region where we currently operate 2,065 stores and to position EMEA to resume delivering revenue growth in operating profitable new stores fulfilling a commitment we made on prior calls.
• Schultz: Highly profitable drive-throughs represent a significant growth opportunity for us and continue to remain a focal point of our store development efforts. And with this, tremendous success of our recently-introduced award-winning designed drive-through only stores with walk-up windows
• Schultz: Let me close by underscoring that despite our size and scope, the Starbucks brand and business is still in the very early stages of its growth and development. The day-to-day management that our senior leadership team is providing the organization is framing up to lead the company into and through the tremendously exciting next phase of breakthrough innovation and acceleration.
• Alstead: In China and Asia-Pacific, the continuity of high-margin growth fuels our long-term aspirations for this dynamic region. CAP total net revenues grew 24% to $265 million in Q2. This is the 14th consecutive quarter of revenue growth in excess of 20%.
• Alstead: In fact, in 2010 the first year we reported CAP as a separate region; revenues totaled only $407 million. Now in 2014, we are well on our way to exceeding $1 billion in annual revenue.
• Alstead: It is impressive growth trajectory for a tremendous market and a testament to the passion of our partners throughout Asia who deliver a fantastic Starbucks experience day-in and day-out.
International:
• Schultz: Last summer we tested Fizzio in select markets in the U.S. and Asia, and following the overwhelming success of those tests, we will be rolling Fizzio out to 3,000 stores across the U.S. sunbelt, in Singapore, Korea and several cities in China this summer.
• Schultz: Our integrated gift card loyalty, social and mobile platform is bar none the largest and most successful in the world. Consider these metrics. Today the Starbucks card program is available in 28 countries. Card transactions now account for over one-third of all transactions in the U.S. and Canada stores.
• Schultz: Over 10 million Starbucks customers are actively using our mobile app, twice the number from only a year ago, and mobile payments now account for over 14% of tender in our company-operated stores in the U.S. and Canada, rising 75% from just a year ago.
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