Starbucks: Still Optimistic

Starbucks Corporation (SBUX), one of the leading roaster and retailer of specialty coffee, registered robust results for the third quarter of 2010. Adjusted quarterly earnings of 29 cents a share came in line with the Zacks Consensus Estimate, but increased 21% from 24 cents delivered in the prior-year quarter. On a reported basis, earnings grew 35% to 27 cents a share compared with 20 cents delivered in year-earlier period.

Revenues and Margins

Total sales jumped 9% to $2,612.0 million in the quarter compared with $2,403.9 million in the prior-year quarter, portraying same-store sales growth of 9%. Same-store sales benefited from traffic and average ticket growth of 6% and 3%, respectively.

Adjusted operating margin for the quarter expanded 270 basis points (bps) to 13.3% compared with the prior-year quarter, reflecting sales leverage and operational competence, partially offset by higher marketing expenses related to launch of Starbucks VIA and the new customizable Frappuccino blended beverages.

Starbucks expects adjusted operating margin at the high end of 12%−13% in fiscal 2010, and a 50 to 100 bps year-over-year expansion in fiscal 2011.

Segment Details

U.S. segment: Net revenue in the segment rose 7% to $1,863 million compared with third-quarter 2009, attributed to a 9% growth in same-store sales. Same-store sales were driven by a 6% rise in traffic and a 3% jump in average tickets, partially offset by the net closure of 144 underperforming stores in the last 12 months.

Adjusted operating margin in the U.S. segment jumped to 16.5% from 13.0% in the prior-year period, reflecting robust same-store sales and ongoing supply chain efficiencies. Based on the quarter’s results, Starbucks expects fiscal 2010 U.S. adjusted operating margin at the high end of 15%−17%. Besides, the company expects fiscal 2011 U.S. adjusted operating margin to expand 100−150 bps annually.

International segment: Net revenue jumped 15% year over year to $551.1 million in the quarter, reflecting a 6% growth in same-store sales. The increase consisted of a 4% rise in traffic and a 2% hike in tickets.

Adjusted operating margin at the International segment surged 280 bps to 10.9% in the quarter, portraying sales leverage on occupancy costs and effective supply chain management. The company projects fiscal 2010 adjusted operating margin at the high end of 8%−10% for the segment. Starbucks anticipates fiscal 2011 U.S. adjusted operating margin to expand 100−200 bps annually.

Global Consumer Products Group (“CPG”) segment: Net revenue rose 8% to $197.9 million in the quarter compared with $182.8 million in the prior-year period, primarily due to the introduction of Starbucks VIA Ready Brew, increased sales of packaged coffee, and sales of Seattle’s Best Coffee in the restaurants.

Operating margin at the CPG segment slipped to 30.4% in the quarter compared with 35.9% in the prior-year period, primarily due to increased marketing expenses related to the launch of Starbucks VIA Ready Brew in the grocery stores. Starbucks projects an operating margin of 35% for fiscal 2010 and 30%−35% for fiscal 2011.

Store Expansion Plan

Starbucks exited the quarter with 16,737 stores including 11,131 domestic and 5,606 international stores. Despite closures, Starbucks commenced 102 outlets in the first three quarter of fiscal 2010.

For fiscal 2010, Starbucks anticipates commencing approximately 250 net new stores globally and both the U.S. and International net new additions are expected to be primarily licensed stores.

Starbucks plans to initiate about 500 net new stores globally in fiscal 2011; approximately 100 in the U.S. and approximately 400 internationally, the majority of which are expected to be licensed stores.

The company assumes capital spending to be approximately $450 million in fiscal 2010 and $500 million−$550 million in fiscal 2011.

Guidance

For fiscal 2010, Starbucks anticipates adjusted earnings in the range of $1.22−$1.23 per share. The guidance includes about 5 cents related to an extra week in the fourth quarter, but excludes 4 cents as restructuring charges. The current Zacks Consensus Estimate of $1.23 remains at the high-end of the guidance range.

The coffee retailer forecasts fiscal 2011 adjusted earnings range of $1.36−$1.41 per share, indicating a 15%−20% annual growth. For fiscal 2011, Starbucks does not factor in any restructuring charges but expects higher coffee costs to pull down earnings by 4 cents. The current Zacks Consensus Estimate of $1.40 is at the high-end of the guidance range.

For fiscal 2011, Starbucks is assuming mid-to-high single-digit total sales growth, driven by low-to-mid single-digit same-store sales growth.