Starbucks Corporation SBUX churned out yet another solid quarterly performance delivering exceptional sales growth in second-quarter fiscal 2015. Shares rose more than 4% in after market hours trading.
Starbucks began trading on a split-adjusted basis from Apr 9. Under its stock-split plan announced on Mar 18, shareholders of record as on Mar 30 received one additional share for each common share they owned.
Earnings Match Estimates
Adjusted earnings of 33 cents per share (on a split adjusted basis) were in line with the Zacks Consensus Estimate as well as within management’s expected range of 32 to 33 cents.
Earnings grew 18% year over year, at the higher end of the guidance range of 16–18% driven by solid top-line growth and higher profits.
Adjusted earnings exclude transaction costs related to the acquisition of its Japanese joint venture (JV). In fiscal second quarter, the coffee giant took 100% ownership of its Japanese JV — Starbucks Coffee Japan, Ltd. — per a deal announced in September last year.
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Revenues and Comps Improve
Despite currency headwinds, total second-quarter sales of $4.56 billion increased 18% year over year and marginally beat the Zacks Consensus Estimate of $4.51 billion.
Same-store sales (comps) grew 7%, higher than 5% in the previous quarter driven by increased traffic trends. The comps rise included 3% improvement in global traffic and 4% average ticket growth.
Successful food/beverage innovation, strong traffic trends in America and China Asia-Pacific (CAP) stores and incremental revenues from Starbucks Japan primarily drove sales.
Margins Increase
Adjusted operating margin increased 70 basis points (bps) to 17.3% driven by strong sales leverage. Margins expanded in all the operating segments, except the CAP region.
However, operating margins declined 220 bps sequentially due to the dilution resulting from ownership change at Starbucks Japan.
Segment Details
Americas: Net revenue in this flagship segment rose 11% from the prior-year quarter to $3.12 billion. The increase was attributable to 7% comps growth, which bettered 5% recorded in the previous quarter supported by a 2% increase in traffic.
Strong food sales, new innovative beverages like Flat White espresso drink and handcrafted Teavana tea beverages led to the strong comps in the quarter.
U.S. food sales grew 16% year on year and contributed 2% to comp growth driven by strong performance of breakfast sandwiches (up 35%) and lunch offerings (up in double-digit range).
Total tea sales in the U.S. stores increased 15% year over year gaining momentum from Teavana’s handcrafted iced teas and tea lattes sold at the retail stores. Beverage innovation and tea drove 1% of the comp growth in the quarter.
In the quarter, record card redemptions following the solid holiday card sales, and loads in the previous quarter also aided sales.
Starbucks Mobile Order & Pay initiative, launched last year, is now available in select stores in Portland and in over 600 stores across the Pacific Northwest. This initiative allows customers to order before arriving at a Starbucks cafe. The company also expects to introduce food and beverage delivery in collaboration with on-demand delivery service, Postmates, in Seattle and through its own employees in specific office buildings of New York City like Empire State building later this year.
These new digital initiatives are expected to quicken service, increase convenience and enhance customer loyalty thereby driving mobile payment transactions.
These digital efforts coupled with other sales drivers, like Starbucks Reserve coffee bars, food & beverage innovation, lunch/evening program and Teavana tea, can further spur traffic trends at the American stores, going ahead.
Europe, Middle East and Africa (EMEA): Net revenue declined 10% year over year to $280.3 million due to currency headwinds, portfolio shift to licensed stores, and slower comps. Comps grew 2%, slowing down from 4% increase seen in the last quarter.
China-Asia-Pacific (CAP): Net revenue soared 124% to $595.2 million driven mainly by incremental $270 million revenues from the acquisition of Starbucks Japan. Excluding Starbucks Japan, CAP revenues grew 24% driven by better comps and store openings. Comps grew 12%, improving significantly from 8% rise in the last quarter, backed by increased traffic.
Channel Development/CPG: This segment includes whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages, Starbucks VIA Ready Brew, and Starbucks and Tazo branded K-Cup packs sold through channels such as grocery, specialty retailers and foodservice among others.
Net revenue grew 16% year over year to $428 million driven primarily by increased sales of packaged coffee and Starbucks-branded K-Cup offerings. Higher K-Cup sales were driven by core product sales as well as strong customer response to new K-Cup products, led by flavored coffees and seasonal offerings, including holiday blends. Foodservice sales also grew 11%.
All-Other: The All-Other segment includes emerging brands including Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution Fresh and Digital Ventures. Revenues in the segment grew 11% to $132.0 million.
Fiscal 2015 Outlook Retained
Starbucks more or less maintained its fiscal 2015 outlook.
For fiscal 2015, the company maintained its adjusted earnings guidance (on a split adjusted basis) in the range of $1.55 to $1.57. Management expects to deliver earnings growth of 17–18% despite the 2% headwind from currency.
Starbucks expects revenues to grow 16–18% in fiscal 2015 despite 2% headwind from currency. Comps are still expected to grow in the mid single-digit range. The company still expects to open 1,650 stores in the year — 600 in the Americas (previously 650), 200 in EMEA (previously 150) and 850 in CAP.
Adjusted operating margin is now expected to increase modestly year over year in fiscal 2015 comparing favorably with prior expectation of its remaining flat to up slightly. However, margins in the Americas segment are expected to be hurt in the latter half of the year by increased U.S. store employee related investments.
Third-Quarter Outlook
Adjusted earnings per share are expected in the range of 40 to 41 cents in the third quarter of fiscal 2015. The earnings expectations were in line with the Zacks Consensus Estimate of 40 cents. In the fourth quarter of fiscal 2015, earnings per share are expected in the range of 42 to 43 cents.
Stocks to Consider
Starbucks carries a Zacks Rank #3 (Hold). Better-ranked restaurateurs include Cracker Barrel Old Country Store, Inc. CBRL, Darden Restaurants, Inc. DRI and Ruby Tuesday, Inc. RT. All these stocks sport a Zacks Rank #1 (Strong Buy).
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