Starbucks (SBUX) reported strong fiscal fourth-quarter results after the close Thursday that showed excellent same-store sales expansion and an improved business outlook, despite higher coffee costs. We’re sticking with our $32 per share fair value estimate, as we had expected the strong results.
Total revenues, on a comparable 13-week basis, jumped about 15%, while earnings per share increased 16% to a record $0.37, excluding non-recurring items (above expectations). Global comps jumped 9% on a comparable 13-week basis thanks to a 6% jump in traffic and a 3% increase in ticket prices (US comps increased 10%, while international comps advanced 6%). Such growth accelerated from previous periods, as for the full fiscal year 2011, global comps increased 8% and came in better than peer Dunkin Brands’ (DNKN) 6% comp for its respective quarter. US consumers seemingly can’t get enough of Starbucks’ brew thanks to growth of its loyalty program (My Starbucks Rewards program) and fall promotions (Pumpkin Spice Latte, etc.), while international growth continues to gain traction.
Starbucks’ operating margin also advanced 60 basis points, to 13.8%, on a non-GAAP basis, which excludes non-recurring gains. Starbucks was able to capitalize on sales leverage to mitigate higher commodity costs (coffee), which negatively impacted operating margins by 290 basis points. On top of the strong performance, management upped its dividend by 31% and announced an authorization to purchase as many as 20 million shares more of the company’s stock. We’re not thrilled with the buyback at these levels.
Looking ahead, the company plans to open 800 net new stores globally during 2012, with half opening in the Americas, 300 in China and Asia, and the balance in EMEA (Europe, Middle East, Russia, and Africa). In fact, the firm expects to have 1,500 stores open in mainland China by 2015, a rapid pace of expansion (it currently has about 500 stores open in China). Starbucks is looking for 10% top-line growth next year driven by mid-single-digit comparable store sales growth, levels we think are achievable. Commodity costs are expected to continue to weigh on results, though the firm still expects operating margin improvement over the just-completed fiscal 2011. We’ll continue to monitor coffee prices closely.
On the bottom line for fiscal 2012, Starbucks indicated that it expects earnings per share to reach $1.82 on the high end, representing as much as 20% growth over fiscal 2011. We’re at $1.84, so we think the firm will beat the high end of its provided range. However, most of this growth is expected to come during the back half of the fiscal year, so there is some forecasting risk, in our opinion, particularly with respect to currency.
That said, 2013 may be better still, as the firm has locked in lower coffee costs and Starbucks K-Cups (which will be available in US retail stores next year) will likely become a more material earnings driver. Its partnership with Green Mountain (GMCR) will help propel results, as well. Starbucks also seems quite positive on its Starbucks Blonde Roast (a premium light roast coffee), which will be available in retail stores in January, and estimates the market opportunity to be about $1 billion. We’re somewhat skeptical that the market opportunity is this large, and any success will likely cannibalize some existing retail coffee sales as consumers switch to the new brew.
All things considered, we’re big fans of Starbucks but its shares are a bit expensive. We’d be looking to add the firm to the portfolio in our Best Ideas Newsletter on a meaningful pullback.