Starbucks shining bright

Earnings season has brought us another set of numbers, this time from Starbucks who have been a lot more resilient than the other fast food/drink type businesses. The numbers were for their fiscal first quarter. Here are the financial highlights: Net revenues increased 11% to a record $3.8bn. Comparable store sales increased 6%, regionally the company saw 7% in the US, 11% in China and -1% in Europe. Importantly margins increased by 40 basis points to 16.6% thanks to a drop in the coffee price. This all amounted to an EPS increase of 14% to 57c. 212 new stores were opened globally including 3 stores in India (in my last message about Starbucks I mentioned that the queues at the Mumbai Starbucks were so long that hawkers were selling tea to the people waiting in the queue).


Earnings for 2013 are expected to come in at $2.14, $2.66 for 2014 and $3.23 for 2015. That is strong growth but the share price certainly expects it, trading at $54.58 which is 16.9 times 2015 earnings. So why so expensive? The growth story is a no brainer. People love coffee and the margins are massive. It is still new to the Asian culture but is becoming more and more integrated as people work more and crave that caffeine boost. It is also an aspirational brand. I always say this but did you know that in China, people make sure they drink their Starbucks coffee with the brand facing outward so that others can see they are drinking Starbucks?


They are also a company with strong ambitions and innovation. Their loyalty programmes have been very successful and recently they have entered the tea business. They are also using their leading brand in coffee to compete with the Nespresso machines. These have become extremely popular amongst the aspiring masses, especially here in SA. The model is great, sell the expensive coffee machine and then lock in clients with the delicious coffee pods. The Starbucks version is called Verismo, check it out here it looks great. They have sold 150 000 machines since the launch.


Here is what CEO Howard Schultz had to say: "Solid growth in our U.S. retail business, further expansion of our Channel Development initiatives and continued successful execution against our expansion plans throughout China and Asia Pacific all contributed to the record results we announced today. Starbucks has never been better positioned to achieve the goals we have set for ourselves around the world and I have never been more optimistic about our future."


After looking at these earnings I am very happy to carry on adding to this stock. It has also sparked a debate in the office after seeing this article in the WSJ the other day headed Is This the End of the Soft-Drink era It talks about how soda sales in the developed world have slowed as people become more health and weight conscious. It is certainly a concern as Coke is one of our core holdings. In the office here none of us drink many soda drinks for that exact reason. But we do drink lots of coffee. It is certainly a trend I can see picking up momentum.


After a lengthy debate we decided to start weaning down our Coke exposure and shift that into Starbucks. If you are happy with that idea give us a call and we will do the swap. Otherwise we will contact you in due course.