SBUX report - Zacks Investment Research



|Starbucks Corp. |(SBUX – NASDAQ) |$61.87* |

Note: This report contains substantially new material. Subsequent reports will have new or revised materials highlighted.

Reason for Report: FY2Q13 Earnings Update.

Previous Edition: March 13, 2013; FY1Q13 Earnings Update; share price and brokers’ material as of Jan 31, 2013.

Brokers’ Recommendation: Positive: 68.2% (15), Neutral: 31.8% (7), Negative: 0.0%(0) Prev. Ed.: (20,7,0)

Brokers’ Target Price: $64.46 (↑$3.37, 22 firms) Brokers’ Avg. Expected Return: 4.2%

*NOTE: Though dated Jun 13, 2013; share price and brokers’ material are as of May 3, 2013.

Note: A flash update on FY2Q13 Earnings was done on Apr 25, 2013

NOTE: The tables below (Revenue, Margins, Earnings per Share, and Balance Sheet) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

Starbucks Corporation is a retailer of specialty coffee, which includes the Starbucks brand, one of the most popular coffee brands in the world.

Of the 22 firms following the stock, 15 firms assigned positive ratings, 7 firms provided neutral ratings whereas none of the firms rated the stock negatively.

Positive or equivalent (15/22 firms): The bullish firms appreciate the strong top-line growth achieved by the company, particularly in the Americas segment and China-Asia-Pacific segment in 2Q13. They expect the Americas comp sales to continue to improve in the upcoming quarters. The firms appreciate the company’s focus on product innovation, particularly in the fast growing premium single cup category. They also like the company‘s strategy of expansion in markets outside the U.S.

Neutral or equivalent (7/22 firms): The firms with a neutral outlook like the strong balance sheet and margin expansion witnessed by the company. However, they prefer to remain on the sidelines due to overall difficult macroeconomic conditions and weak European sales.

Jun 13, 2013

Overview

Based in Seattle, Wash., Starbucks Corporation is the leading retailer of specialty coffee worldwide. The company buys and roasts high-quality whole bean coffee, which is sold along with handcrafted coffee and tea beverages and a variety of fresh food items. The company operates through company-operated and licensed stores. The licensed stores are licensing arrangements with business partners to use Starbucks products. Starbucks’ product portfolio includes the famous Starbucks coffee as well as other branded products like, Tazo Tea, Seattle's Best Coffee and Starbucks VIA Ready Brew.

The company also offers consumer packaged goods and foodservice operations. The consumer packaged goods operations include packaged coffee and tea sold in grocery and warehouse club stores. Under its foodservice operations, Starbucks supplies some products to restaurants, office coffee distributors, hotels, airlines and other retailers.

Starbucks operates through the following segments: Americas (inclusive of the US, Canada, and Latin America); Europe, Middle East, and Africa (EMEA); China-Asia-Pacific (CAP); Channel Development (CD); and Other. The CD segment is not a geographic region but an entirely different channel (referred to as CPG channel henceforth). The Consumer Packaged Goods (CPG) business reflects everything outside the Starbucks stores like packaged coffee, foodservice operations, K-Cups, Starbucks VIA Ready Brew and Tazo tea. The Other category includes Seattle's Best Coffee, Evolution Fresh and Digital Ventures.

In fiscal 2012, Starbucks acquired Atlanta-based Teavana Holdings, Inc., a specialty retailer of tea, for approximately $620 million in cash. Teavana has now become a wholly-owned subsidiary of Starbucks.

Brokerage firms identified the following factors for evaluating the investment merits of SBUX:

|Key Positive Arguments |Key Negative Arguments |

|The company commands a strong leadership position, possesses a powerful |The price of coffee is subject to significant volatility. Supply and |

|brand portfolio, enjoys strong consumer acceptance, and has global |price can be affected by multiple factors in the producing countries, |

|expansion opportunities. |including weather, political and economic conditions. |

|Continued innovation and new product offerings are expected to drive both |The company is facing challenges in its European business due to the |

|top- and bottom-line growth for the company, going forward. |region’s poor economic conditions, high unemployment and fragile consumer|

| |confidence. |

|The CPG business is a largely diverse (in terms of revenue mix), high | |

|margin, high return on capital business, which has given a boost to both | |

|top- and bottom-line growth in the past few quarters. | |

|Starbucks brand is gaining popularity with consumers across Asia as the | |

|company continuously expands its store base outside the U.S. The company | |

|remains focused on increasing its presence in China, where demand is | |

|growing very fast and revenue growth is expected to be robust. | |

SBUX’s fiscal year ends on Sep 30; fiscal references do not coincide with the calendar year. More information on the company is available at

Jun 13, 2013

Long-Term Growth

Starbucks intends to maintain its strong brand name and expand in the global market in the long run. Management focuses on increasing its global market share by judiciously opening stores in new and existing markets, generating more revenues from existing stores, controlling costs and brand building.

For its Americas segments, the company intends to capitalize on the strong demand for Starbucks products in America. The company intends to add about 3,000 new stores in Americas over the next five years, of which 1,500 stores are to be opened in U.S.

The company believes China will become its second-largest market by 2014. China is one of the most important markets for Starbucks and the company plans to open 1,500 stores in 70 cities in 2015.

The company expects revenues and profits from Europe, Middle East and Africa segment to improve significantly over the next five years. Also, the company intends to focus on brand building, generating more revenues from existing stores and increasing licensing agreements in Europe.

The international footprint of the Consumer Packaged Goods (CPG) segment is expected to double by 2015. Starbucks plans to build 100,000 distribution centers in 20 countries.

Starbucks is constantly on the lookout for new additions to its product portfolio, other than coffee, like La Boulange bakery products and Evolution Fresh juices. Starbucks acquisition of Teavana Holdings in Dec 2012 will enable Starbucks to expand in the $40 billion global tea market and claim a leading position.

In Sep 2012, the company introduced the Verismo single cup coffee machine, which allows customers to prepare Starbucks-quality espresso and coffee drinks at home, using milk pods also developed by Starbucks. Verismo is a major step by the company to take a share of the premium single-cup segment, which is the fastest growing market in the coffee industry.

Jun 13, 2013

Target Price/Valuation

Provided below is a summary of target price/valuation as compiled by Zacks Digest:

|Rating Distribution |

|Positive |68.2%↓ |

|Neutral |31.8%↑ |

|Negative |0% |

|Avg. Target Price |$64.46↑ |

|Digest High |$75.00↑ |

|Digest Low |$53.00 |

|No. of Analysts with Target price/Total |22/ 22 |

The risks to target price include rise in price of coffee, lower consumer traffic and intense competition.

Recent Events

Starbucks Meets 2Q Earnings; Misses Sales – April 25, 2013

Starbucks’ adjusted earnings of $0.48 per share for the second quarter of fiscal 2013 were in line with the Zacks Consensus Estimate. Earnings of this coffee giant grew 20% year over year driven by solid margin growth.

However, the coffee giant failed to meet the Zacks Consensus Estimate for revenues.

Adjusted earnings excluded a one-time gain from the sale of a minority equity stake in a joint venture in Mexico.

Revenues and Margins

Total sales for the second quarter increased 11% year over year to $3.56 billion but slightly missed the Zacks Consensus Estimate of $3.59 billion. Beverage and food innovations and steady sales growth in the U.S. and Asia were partially offset by weakness in Europe.

Adjusted operating margin increased 180 basis points (bps) to 15.3% driven by strong sales leverage and lower coffee costs.

Fiscal 2013 Outlook Retained

The company upped its earnings guidance for 2013 but maintained its sales, comps and operating margin outlooks.

Revenues

Starbucks reported total net revenue of $3.6 billion in FY2Q13, up 11% y/y, on the back of strong same store sales. The Zacks Digest average revenues were in line with the company report.

Same store sales, which exclude the impact of new company-operated stores opened in the past 13 months, grew 6%, same as in the first quarter. In the quarter, the company opened 590 net new stores all over the world, including 337 Teavana stores. In December last year, the company bought Teavana, a specialty retailer of tea.

Provided below is a summary of revenue as compiled by Zacks Research Digest:

|Revenue ($M) |2Q12A |

|Lead Analyst |Kinjel Shah |

|Last done by |Sarmistha Roy Chowdhury |

|QCA |Kinjel Shah |

|Copy Editor: |Debasmita Banerjea |

|Content Ed. |Kinjel Shah |

|Reason for Update |2Q13 earnings |

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June 13, 2013

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