Starbucks margins growing, as is the share price

A couple of day's back we received 3rd quarter results form Starbucks who have been performing exceptionally well. What is even more impressive is that this performance is during a period when competitors like McDonalds and Yum! Brands have been struggling. The share price has followed suit growing 30.3% so far this year which includes a 7% boost on the day of this release. The stock has increased 52.62% in 1 year and a phenomenal 402% in 5 years. Very nice, but are you too late if you have not bought yet? Let's have a look.


Net revenues increased 13% to $3.7bn, operating margin increased a solid 150 basis points to 16.4%. This resulted in earnings per share increasing 28% to 0.55c. In the period the company opened 341 new stores and now operates 19 209 stores globally. Expectations are for 6000 of these stores to be in developing markets over the next few years.


The company expects earnings to be around $2.60 next year which shows growth of 20%. Analysts expect earnings for 2015 to grow even faster, $3.35 which shows growth north of 23%. At $72.45 the stock is certainly not cheap trading at 28 times next year's earnings. But it is growing fast and the potential to maintain that growth pace over an extended period of time is big.


So what makes this company so special? First and foremost they are growing fast in their traditional US market where 73% of revenues come from. Same store sales grew 9% on the back of strong menu innovations and digital capabilities. 10% of Starbucks sales in the US were paid with smartphones. That is a milestone worth being proud of.

Then there are the developing markets and I am talking more specifically about Asia which traditionally has been a tea drinking region. In China and the Asia Pacific 119 stores were opened in the period and revenues increased 29%. Operating income from the region grew 38%. Although accountable for only 6.3% of sales, I get the feeling this is going to become more significant every quarter. Starbucks have managed to establish themselves as the premium coffee retailer. People want to be seen there and as coffee becomes more prominent in these regions the company is bound to grow at a very fast pace off a low base.


Margins are expanding as coffee inflation decreases and farming becomes more efficient, I'd expect earnings to grow well above those forward estimations mentioned earlier. With great menu innovations which include foods, juices and even tea, extremely exciting prospects in developing nations and strong innovations in terms of loyalty programmes and payments, we continue to buy Starbucks even at these levels.