PDF Starbucks Corp - Zacks Investment Research

[Pages:14]February 20, 2015

Starbucks Corp (SBUX-NASDAQ)

Current Recommendation Prior Recommendation Date of Last Change

Current Price (02/19/15) Target Price

NEUTRAL

Outperform 03/24/2010

$93.17 $98.00

SUMMARY DATA

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

$93.17 $68.73

28.45 0.78

5,588,253

750 $69,878

2.32 71 4

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

$1.28 1.37

11.7 20.3 24.9

P/E using TTM EPS

33.6

P/E using 2015 Estimate

29.8

P/E using 2016 Estimate

25.3

Zacks Rank *: Short Term 1 3 months outlook

* Definition / Disclosure on last page

2 - Buy

? 2015Zacks Investment Research, All Rights reserved.

SUMMARY

Starbucks adjusted earnings of $0.80 per share in the first quarter of 2015 were in line with the Zacks Consensus Estimate. However, earnings grew 23% year over year driven by solid top-line improvement and margin expansion. Strong traffic trends in the American stores and improved comps in the China Asia-Pacific segment resulted in 13% increase in sales. A strong holiday performance improved traffic trends in the American stores. We believe that Starbucks enjoys healthy fundamentals strong global retail footprint, successful food/beverage innovations, best-in-class loyalty program and digital offerings, rapid growth in international markets and ongoing impressive CPG growth. Moreover, strong food sales, new handcrafted beverages, lunch/evening program, Teavana tea, K-Cup innovations and digital efforts can fuel stronger traffic in fiscal 2015. However, a challenging retail environment keeps us on the sidelines.

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Below Average

Large-Growth Retail-Restrnts

43 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Dec)

(Mar)

2013 2014 2015 2016

3,800 A 4,240 A 4,803 A 5,438 E

3,556 A 3,874 A 4,488 E

Q3 (Jun)

3,742 A 4,154 A 4,815 E

Q4 (Sep)

3,795 A 4,181 A 4,958 E

Year (Sep)

14,892 A 16,448 A 19,064 E 21,409 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Dec)

(Mar)

(Jun)

(Sep)

(Sep)

2013 2014

$0.57 A $0.71 A

$0.48 A $0.56 A

$0.55 A $0.67 A

$0.60 A $0.74 A

$2.20 A $2.66 A

2015

$0.80 A

$0.65 E

$0.80 E

$0.88 E

$3.13 E

2016

$0.96 E

$3.69 E

Projected EPS Growth - Next 5 Years %

18



111 North Canal Street, Chicago IL 60606

OVERVIEW

Founded in 1985 and based in Seattle, WA, Starbucks Corporation (SBUX) is the leading roaster and retailer of specialty coffee in the world. In addition to fresh, rich-brewed coffees, Starbucks offerings include many complementary food items and a selection of premium teas and other beverages, sold mainly through the company s retail stores. Starbucks has more than 21,000 stores across 66 countries. The company s popular brands include Starbucks coffee, Teavana tea, Tazo Tea, Seattle's Best Coffee, La Boulange bakery products and Evolution Fresh juices.

Other than the company s own retail stores (accounting for 79% of fiscal 2014 revenues), it generates revenues through licensed stores (10%), consumer packaged goods (8%) and foodservice operations (3%). The company receives royalties and license fees from the U.S. and international licensed stores. Under its consumer packaged goods operations, Starbucks sells packed coffee and tea products as well as a variety of ready-to-drink beverages and single-serve coffee and tea products to grocery, warehouse clubs and specialty retail stores. It also includes revenues from licensing deals with many partners to produce and sell its Starbucks and Seattle's Best Coffee branded products. Under its foodservice operations, Starbucks supplies some of its products to restaurants, office coffee distributors, hotels, airlines and other retailers.

Starbucks operates through the following segments: Americas (inclusive of the U.S., Canada and Latin America); Europe, Middle East and Africa (EMEA); China-Asia-Pacific (CAP); and Channel Development (CD); and All-Other. The CD segment is not a geographic region but an entirely different channel (referred to as CPG channel henceforth). It includes roasted whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages (like Frappuccino and Starbucks Refreshers) and Starbucks and Tazo branded K-Cup packs sold through channels such as grocery, specialty retailers, and foodservice to name a few. The All-Other segment comprises emerging brands including Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution Fresh and Digital Ventures.

The company s long-term targets include revenue growth of 10% or greater, global comparable store sales in the mid single-digits, earnings per share growth of 15% to 20% and 25% or higher return on invested capital.

REASONS TO BUY

Strong Brand Position: Starbucks is one of the most recognized coffee brands in the world. From espresso to specialty roast and ground coffee to premium single-serve market, Starbucks commands authority and a leading position in all coffee segments. It is the number one premium packaged coffee brand in America. Further, management focuses on increasing its global market share by judiciously opening stores in new and existing markets, remodeling existing stores, product innovation, controlling costs and brand building.

Best-in-Class Loyalty Program and Digital Offerings: Starbucks holds a leadership position in digital, card, loyalty and mobile capabilities. The accelerating global adoption of smartphones and mobile technologies is gradually transforming and evolving the retail landscape in areas of payment, loyalty and consumer experiences.

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Retail companies are witnessing a shift in consumer shopping behavior from bricks-and-mortar stores to online shopping. As such, CEO Schultz intends to focus more on leveraging the mobile and digital assets and loyalty and e-Commerce platforms to create more revenue streams.

Starbucks loyalty cards are gaining popularity and at present, nearly one-third of all the U.S. and Canada transactions are made through Starbucks cards. At the end of Dec 2014, the company had 9 million active members in the U.S. under My Starbucks Rewards (MSR) program, up 23% from the year-ago period.

Moreover, Starbucks mobile app is undoubtedly one of the most widely used mobile payment app in the U.S. Nearly 16% of all U.S. transactions take place through mobile, growing 50% annually. In Dec 2014, Starbucks launched its Mobile Order & Pay initiative in 150 stores Portland, OR and plans to launch it nationwide by 2015-end. This initiative will allow customers to order before arriving at a Starbucks cafe. The company also expects to introduce food and beverage delivery through either a third party or its own employees in select urban markets in the second half of 2015. These new mobile initiatives are expected to quicken service, increase convenience and enhance customer loyalty thereby driving mobile payment transactions and spurring traffic. Meanwhile, following the success of its mobile payment services, Starbucks is receiving partnership offers from several mobile payment companies.

The company is also witnessing an increased usage of MSR in countries outside the U.S. like China, Korea and Canada. With the Jan 2014 launch of Starbucks gift card in China, these are now available in 29 countries. MSR transactions in China account for over 40% of the total tender.

Further, the company is trying to broaden the reach of the Starbucks loyalty and mobile platform to its CPG business and emerging brands. Starbucks customers can now earn reward points under the MSR loyalty program on purchase of packaged coffee at its grocery channels which is expected to further boost sales. Further, customers can now use Starbucks cards as well as Starbucks mobile application at certain Teavana, Evolution Fresh and La Boulange locations.

Focus on Innovation: Starbucks is strengthening its product portfolio with significant innovation around beverages, refreshment, health and wellness, tea and core food offerings.

Beverage innovations have been a significant contributor to comps growth for Starbucks over the years. Its energy drink, Starbucks Refreshers, made from real fruit juice and green coffee extract has been a hit in the afternoon daypart. Seasonal offerings like pumpkin spice latte have been in the market for 10 years now and are quite popular. The company is also looking to put premium arabica coffees, Starbucks Reserve and Clover, a high-quality single serve brew coffee in more stores. Other successful beverage innovations include, Fizzio sodas, Teavana Oprah Chai and Green Tea Red Bean Frappuccino in Asia Pacific.

Apart from the numerous beverage innovations, Starbucks has also been making an effort to offer more nutritional and healthy products to its customers. The coffee giant has been able to fully capitalize on the Evolution Fresh Juice brand since its acquisition in 2011. In addition to being available in approximately 8000 U.S. Starbucks stores, Evolution Fresh juices are available at supermarket chain, Whole Foods locations nationwide. Further, Starbucks has joined forces with dairy products maker, Danone, to create Evolution Fresh-branded Parfait Greek yogurt products to be rolled out at Starbucks stores in calendar 2015.

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Starbucks is fast expanding its food offerings in the U.S. after the launch of its premium bakery goods (following La Boulange acquisition in 2012), breakfast and lunch sandwiches and salads to complement its drinks. Food contributes around 20% of the company s U.S. revenues. Starbucks plans to double its U.S. food sales to more than $4 billion over the next five years. Moreover, the company plans to expand its lunch menu and offer locally relevant snacks around the world. Starbucks much talked about evening program food, wine and beer offerings available at some stores will be expanded to more stores in fiscal 2015, with plans of rolling it out in 20 25% of Starbucks stores in the U.S. by fiscal 2019. The evening program is expected to add $1 billion in revenues by the end of fiscal 2019.

With the acquisition of specialty tea retailer Teavana in Dec 2012, the company aims to capture further share of the $109 billion global tea category. Starbucks has opened 60 Teavana tea bars offering an assortment of handcrafted tea beverages, premium loose leaf teas, tea-inspired food offerings and tea merchandise. Starbucks is seeing increased sales of Teavana handcrafted beverages like Teavana Oprah Chai (in collaboration with global media leader and philanthropist Oprah Winfrey) and Teavana Shaken Iced Tea and Teavana premium loose-leaf teas at its Starbucks stores in North America. While Teavana tea represents a small portion of sales presently, management remains focused on growing the brand to $2 billion over the next five years.

We believe Starbucks new food and beverage offerings will be a major driver of comps in the next few years.

Brisk Growth of the CPG Business: The CPG business is growing rapidly and is now the secondlargest unit at Starbucks that has grown three times faster than the company average. In North America, the company has 100,000 points of distribution in the CPG channels. It is a largely diverse (in terms of revenue mix), high-margin, high-return-on-capital business. Contributing heavily to the CPG success is the premium single-serve platform where K-Cup sales have grown massively. The CPG business revenues increased 50% in fiscal 2012, around 10% in fiscal 2013 and 11% in 2014. Also, Evolution Fresh and Teavana present significant long-term opportunities within the CPG channel. Over the next five years, Starbucks expects to grow its Channel Development segment revenues by 60% and nearly double its operating income.

Strong American Business: The company s U.S. operations, its largest business, accounts for almost two-thirds of the consolidated total net revenue of Starbucks. The Americas business has been doing well for the last couple of years due to beverage innovations, expanded food offerings, digital initiatives and operational improvements. Moreover, food is being considered as an important longterm growth driver for the U.S. comps. The launch of the La Boulange products in the U.S. companyoperated stores is a material elevation of Starbucks food platform. In addition, the company is expanding its other food offerings, including new breakfast pairings and lunch and evening programs.

Drive-through stores which generate incremental revenues and profits compared to traditional stores are also an important sales driver in the domestic market. Following the success of drive-thru stores, Starbucks plans to open small footprint express stores next year in New York City to cater to the onthe-go coffee drinkers.

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Expanding beyond the U.S.: In the past two years, management has successfully turned around its EMEA business by improving customer experience, up-leveling product offerings and growing margins through process and supply chain efficiencies.

Moreover, the Starbucks brand is gaining popularity with consumers across Asia as the company is increasingly investing in the Asian markets. The relatively low per-capita consumption as well as a burgeoning middle class with rising income levels increase the demand for convenience food and beverages and promise significant growth potential.

Management believes that China and the Asia-Pacific region will drive much more meaningful business growth over the next five years supported by rapid unit growth, growing brand awareness, and increased usage of the mobile/loyalty platforms. The region has delivered 17 consecutive quarters of more than 20% revenue growth. Starbucks plans to double CAP store count to roughly 10,000 and triple CAP revenues to over $3 billion by 2019.

Starbucks' business in China is rapidly growing due to innovative store designs, local product innovations and the success of MSR program. The company also expects to introduce its CPG business in China in the long term. Starbucks plans to double its store count in China to over 3,000 by 2019 from the present 1500.

Beyond China, the company is accelerating growth in countries like Japan, Korea, Thailand and Indonesia. In Japan, management expects to take full ownership of its Japanese joint venture (JV) Starbucks Coffee Japan, Ltd. to accelerate store growth and innovation in this market.

Moreover, Starbucks has 63 stores in the lucrative Indian market and 8 stores in Vietnam. Further, it plans to open 100 stores each in Indonesia and Philippines over the next 3 4 years.

Outside Asia-Pacific, the company operates more than 500 stores in Latin American countries like Chile, Mexico, Argentina and Colombia.

REASONS TO SELL

Challenging Macroeconomic Environment: As a retail restaurant, Starbucks is dependent on consumer discretionary spending environment. Despite moderate improvement in economic growth, consumers are increasing their spending only modestly, as a surge in job growth this year is yet to

translate into significantly higher wages. High interest rates, higher healthcare costs and still-

tightened credit availability continue to hurt consumer discretionary spending in the U.S.

In Europe, though signs of improvement have been seen, markets are yet to reach pre-crisis levels.

Rising Commodity Cost Pressures: The overall cost environment for food commodities was under pressure in 2014 due to domestic and worldwide agricultural supply and demand imbalance and other macroeconomic factors. Commodity costs are not expected to be a tailwind in fiscal 2015 like the previous two years. With coffee prices rising in 2014, management expects commodity cost to have a roughly neutral year-over-year impact on fiscal 2015 earnings.

Starbucks Products Less Popular Outside the U.S.: Consumer tastes vary by regions and international consumers may not like Starbucks products to the same extent as their U.S. counterparts. Though the company is making efforts to expand beyond the U.S., if it does not properly preserve, grow and leverage the value of its brands, its international expansion plans may fall apart.

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RECENT NEWS

Starbucks Launches Premium Coffee Delivery Service Feb 17, 2015

Starbucks announced the launch of a subscription service under which freshly roasted premium coffees will be delivered to customers homes straight from its newly opened Seattle roastery.

Through this subscription, upscale coffee lovers will get Starbucks select small-batch premium Reserve coffees available only at the Seattle Reserve Roastery and Tasting Room or through monthly subscriptions.

The company will deliver the coffee beans within three to five days of being roasted. While a one-month subscription costs $24, a 12-month subscription is priced at $288.

Starbucks First Quarter Earnings In Line; Holiday Offerings Drive Sales January 22, 2015

Starbucks announced solid first-quarter fiscal 2015 results its most successful holiday performance in more than 40 years.

Moreover, the company named board member, Kevin Johnson, as the president and chief operating officer (COO) and raised the lower end of fiscal 2015 earnings forecast.

Earnings In Line

Adjusted earnings of $0.80 per share were in line with the Zacks Consensus Estimate as well as within management s expected range of $0.79 $0.81.

Earnings grew 16% year over year driven by solid top-line growth and margin expansion.

Adjusted earnings exclude special items, mainly gain related to the acquisition of its Japanese JV.

In Sep 2014, the coffee giant announced plans to take full ownership of its Japanese JV Starbucks Coffee Japan, Ltd. for around $914 million. The company has already acquired 94% equity stake in Starbucks Japan. The transaction is expected to be completed before the end of first half of calendar 2015.

Revenues and Comps Improve

Total first-quarter sales of $4.80 billion increased 13% year over year and marginally beat the Zacks Consensus Estimate of $4.79 billion.

Same-store sales (comps) grew 5%, same as the previous quarter. The comps rise included 2% increase in global traffic and 3% average ticket growth.

Incremental revenues from Starbucks Japan, strong traffic trends in the American stores and improved comps in the China Asia-Pacific (CAP) segment primarily drove sales.

We believe that Starbucks digital efforts, coupled with strong food sales, new handcrafted beverages, revamped lunch and evening program, Teavana tea and K-Cup innovations should spur traffic in fiscal 2015.

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Margins Remain Strong

Adjusted operating margin increased 80 basis points (bps) to 19.5% driven by strong sales leverage. Margins expanded in all the operating segments, except the CAP region.

However, operating margins declined 50 bps sequentially due to the dilution resulting from ownership change in Starbucks Japan.

Segment Details

Americas: Net revenue in this flagship segment rose 10% from the prior-year quarter to $3.37 billion, attributable to 5% growth in comps driven by a strong holiday season.

A strong holiday food and beverage line-up, solid performance of holiday gifting merchandise and expanded collection of Starbucks gift cards and a decent consumer response to the "Starbucks for Life" promotion aided traffic trends at the American stores.

Food contributed 2% to comp growth driven by strong performance of breakfast sandwiches (up 29%) and lunch offerings (up 15%).

Holiday beverages recorded 9% year-over-year growth including the big hit Chestnut Praline Latte. Total tea sales in the U.S. stores increased 17% year over year gaining from Teavana s handcrafted iced teas

Last year, during the holiday season, Starbucks witnessed slower-than-expected traffic at the American stores as a result of continued shift away from brick and mortar retail to online sales. As such, CEO Schultz is focusing more on leveraging the mobile and digital assets as well as loyalty and e-Commerce platforms to create more revenue streams.

The success of the Starbucks card program in the holiday quarter clearly shows that the company s efforts are paying off. Dollars loaded on Starbucks Cards surged 17% year over year to a record $1.6 billion. Moreover, one out of every seven American received a Starbucks gift card this season, up from one in eight in 2013. In the first quarter alone, Starbucks added almost 900,000 new MSR members.

Adjusted operating margin improved 50 bps to 24.3% driven by strong sales leverage.

In fiscal 2015, operating margins are expected to improve moderately over 2014 levels as favorable sales leverage will be offset by expenses related to the mobile order and pay rollout and ongoing investments in employees.

Europe, Middle East and Africa (EMEA): Net revenue declined 2% year over year to $333.3 million due to currency headwinds. Excluding currency headwinds, revenues grew 3% driven by 4% increase in comps. Starbucks continues to outperform in the U.K.

Adjusted operating margin increased 510 bps to 15% due to solid sales leverage and cost control. A shift to more higher-margin licensed stores also pulled up margins.

The segment has turned around in the past two years driven by management s efforts to improve customer experience, up-leveling product offerings and improving margins through process and supply chain efficiencies. In fiscal 2015, operating margins are expected to be at the higher end of the 10 12% target.

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China-Asia-Pacific (CAP): Net revenue grew 86% to $495.8 million driven mainly by incremental $172 million in revenues from the acquisition of Starbucks Japan. Excluding Starbucks Japan, CAP revenues grew over 20% driven by better comps and store openings. Comps grew 8%, improving significantly from 5% rise in the last quarter, driven by increased traffic. China growth outpaced the region.

Operating margin at the CAP segment declined 860 bps year over year to 21.8% due to dilution from ownership change in Starbucks Japan. Excluding Starbucks Japan, CAP margin increased 200 bps driven by strong sales leverage and improved operational performance.

In fiscal 2015, operating margins are expected to remain in the high-teens range, including amortization expense related to the planned acquisition of Starbucks Japan.

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 10% year over year to $442.6 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 limitedtime offerings like Fall Blend.

Adjusted operating margin increased 600 bps to 35.6% driven by significant top-line growth, low coffee costs and other cost of goods sold efficiency.

In fiscal 2015, operating margins in the segment are expected to improve only modestly from 2014 levels as coffee favorability wanes through the remainder of fiscal 2015.

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 3% to $164.6 million.

Other Financial Details

In the quarter, the company repurchased nearly 3 million shares with 13 million shares remaining under the current authorization.

Fiscal 2015 Outlook

Starbucks expects revenues to grow 16 18% in fiscal 2015, including approximately 6 7% of revenue growth from the Starbucks Japan acquisition.

Comps are still expected to grow in the mid single-digit range. The company expects to open 1,650 stores in the year 650 in the Americas, 150 in EMEA and 850 in CAP.

The lower end of fiscal 2015 adjusted earnings per share guidance (excluding adjustments related to Starbucks Japan) was raised by a penny, encouraged by strong first-quarter performance. Adjusted earnings per share are now expected in the range of $3.09 to $3.13 versus $3.08 to $3.13, representing 16 18% growth.

The company expects EPS to be near the lower end of the range in the first half and closer to the upper end in the second half.

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