Company Overview: Starbucks Corporation (Starbucks) is a roaster, marketer and retailer of coffee. As of October 2, 2016, the Company operated in 75 countries. The Company operates through four segments: Americas, which is inclusive of the United States, Canada, and Latin America; China/Asia Pacific (CAP); Europe, Middle East, and Africa (EMEA), and Channel Development. The Company's Americas, CAP, and EMEA segments include both company-operated and licensed stores. Its Channel Development segment includes roasted whole bean and ground coffees, Tazo teas, Starbucks- and Tazo-branded single-serve products, a range of ready-to-drink beverages, such as Frappuccino, Starbucks Doubleshot and Starbucks Refreshers beverages and other branded products sold across the world through channels, such as grocery stores, warehouse clubs, specialty retailers, convenience stores and the United States foodservice accounts.


SBUX Details

Starbucks Corporation (NASDAQ: SBUX), which is a well-known name as a roaster, marketer, and retailer of specialty coffee worldwide has been delivering decent revenues and profits at the back of underlying strength of the business. The recent Q3 2018 results have continued the streak. The group that functions through four segments - Americas, China/Asia Pacific, Europe, Middle East, and Africa, and Channel Development, is also known to provide licenses to its trademarks through licensed stores, and grocery and foodservice accounts. This sets a distinct revenue stream. The group’s return on equity has been improving significantly (from 48.2% in 2016 to 50.9% in 2017) against industry median of 11.9%. Its earnings retention which is indicative to be opposite of dividend payout has gone down from 0.56x in 2016 to 0.47x in 2017, in line with company’s belief to have better returns earmarked for shareholders. Going forward as well, SBUX aims to deliver better shareholder returns.

Granted Nestlé the perpetual rights to market company’s products: SBUX and Nestlé have recently come together and signed an agreement under which SBUX has granted Nestlé perpetual rights to market its Consumer Packaged Goods along with Foodservice products at a global level, outside of the company’s coffee shops. The alliance will thus be working on SBUX range of whole beans, roast and ground coffee, and instant and portioned coffee. The alliance between the two companies covers Starbucks packaged coffee and tea brands, such as Starbucks, Seattle’s Best Coffee, TeavanaTM/MC, Starbucks VIA Instant, Torrefazione Italia coffee and Starbucks-branded K-Cup pods. This arrangement however excludes the Ready to Drink products, and as mentioned earlier, sale of products within Starbucks shops. Nestlé will pay Starbucks $7.15 billion in closing consideration, and Starbucks will retain a significant stake as licensor and supplier of roast and ground and other products going forward. The experience along with capabilities of the companies will be leveraged through the above move and will help both work on innovation with an aim to advance product offerings at a worldwide scale. Other benefits will entail unlocking of global expansion opportunities in the grocery and foodservice space for Starbucks under the global reach of Nestlé brand. It is to be noted that about 500 Starbucks employees in the United States and Europe have been said to join Nestlé family.

Strategic Partnership with Alibaba Group: SBUX has formed a strategic - “New Retail” partnership with Alibaba Group Holding Ltd. to transform the coffee industry in China. This will entail collaboration across Alibaba’s key businesses - Ele.me, Tmall, Hema, Taobao and Alipay, to enrich the experience for Chinese customers. The company has announced plans to leverage Ele.me’s on-demand platform that consists of 3 million registered delivery riders, to pilot delivery services in Beijing and Shanghai in September 2018, delivery program to expand across 30 cities to more than 2,000 stores by end of 2018. Moreover, SBUX will partner with Hema supermarkets to create “Starbucks Delivery Kitchens” specifically designed for Starbucks delivery order fulfillment, which will further expand delivery capabilities while ensuring the highest levels of the third-place in-store customer experience. SBUX expects to open “Starbucks Delivery Kitchens” in selected Hema supermarkets in Shanghai and Hangzhou in September 2018 itself, with plans to expand its presence to other cities over time. Additionally, as per the strategic partnership, the companies are expected to co-create an unprecedented virtual Starbucks store that will integrate multiple platforms across Starbucks and the Alibaba ecosystems. SBUX customers will be able to access and enjoy a one-stop Starbucks Experience while purchasing any merchandise online, buying a Starbucks handcrafted beverage to be delivered to a friend or sending a Starbucks gift of love on the “Say it with Starbucks” social gifting platform. Starbucks will progressively integrate its Starbucks Rewards (SR) membership platform onto the centralized system to leverage its consumer insights to deliver a truly personalized experience to its customers, while establishing a strong foundation for the future development of Starbucks digital experiences in China. On the other hand, SBUX has planned to build 600 net new stores annually over the next five years in Mainland China, which is a goal that will double the market’s store count from the end of FY17 to 6,000 across 230 cities by FY22.

Mixed Third Quarter 2018 Performance: SBUX has posted mixed results for the third quarter of 2018. SBUX in the third quarter of FY 18 has reported the adjusted earnings per share of 62 cents, beating the analysts’ estimates for the adjusted earnings per share of 61 cents. The company had reported the adjusted revenue growth of 11.5 percent to $6.23 billion in the third quarter of FY 18, slightly missing the analysts’ estimates for revenue of $6.25 billion. The company’s same-store sales increased by 1 percent globally due to a 3% increase in average ticket compared to 0.9 percent expected growth. During the third quarter 2018, Americas and U.S. comparable store sales rose by 1% and 1% decline in CAP comparable store sales with 1% fall in the China comparable store sales were noted. Overall, in the third quarter, the company has reported a record profit of $852.5 million compared with $691.6 million a year ago. The revenue grew due to 3% net benefit received due to the consolidation of the acquired East China business and other streamline-driven activities, that comprise of closure of Teavana mall store, divestiture of the Tazo, and the conversion of certain international retail operations from company-owned to licensed models. Further, the company received 1% benefit from the foreign currency translation. The company posted for the third quarter, the Non-GAAP operating margin of 18.5%, that declined by 230 basis points compared to the prior year. This is primarily due to higher investments in the store partners (employees), product mix shift, largely food related, and the impact of the ownership change in East China, partially offset by lower restructuring and impairment costs. Additionally, SBUX Rewards loyalty program had added 1.9 million active members in the U.S., which is up 14% year-over-year. The total member spend now represents 40% of U.S. company-operated sales and Mobile Order and Pay represents 13% of U.S. company-operated transactions. In the third quarter 2018, the company had opened 511 net new stores and is now operating 28,720 stores across 77 markets. The company had closed more than 8,000 company-owned stores and its corporate offices in the U.S. on May 29 (for a day) for conducting racial-bias training for partners.


Third Quarter 2018 Operating Results (Source: Company Reports)

Strategic Priorities and Operational Initiatives by Starbucks: SBUX has undertaken three strategic priorities to regain the company’s revenue and earnings momentum. These include accelerating the growth in the U.S. and China, which are the company’s targeted long-term growth markets. The company plans to expand and leverage the global reach of the brand through the Global Coffee Alliance, and is focusing on increasing shareholder returns.

Capital Management: During the third quarter of 2018, SBUX has repurchased 17.1 million shares of common stock and approximately 107 million shares are currently available for purchase under current authorizations. Moreover, SBUX has declared a cash dividend of $0.36 per share, payable on August 24, 2018, to shareholders of record as of August 9, 2018. Additionally, the company plans to raise dividends and increase the share-buyback program to return $10 billion more to shareholders by 2020. Overall, the company has raised the target for cash returned to shareholders to $25 billion through FY20, including a 20 percent increase in the company’s regularly scheduled quarterly dividend.


Americas Segment Result (Source: Company Reports)

Key Personnel Changes: SBUX has appointed Myron E. “Mike” Ullman as the new chairman of the Board and Mellody Hobson as vice chairman of the Board. This has been done after the retirement of Howard Schultz as executive chairman and member of the Board of Directors effective from June 26, 2018. Moreover, SBUX has announced that Scott Maw, executive vice president and chief financial officer, will retire effective from November 30, 2018. The company has therefore launched an external search for a new CFO. Meanwhile, after the retirement, Maw will continue to support the transition as a senior consultant through March 2019.

FY 18 Outlook: SBUX for FY 18 expects approximately 2,300 net new Starbucks stores globally. The company expects full year global comparable store sales growth to be just below the 3-5% targeted range and for the fourth quarter, it is expected to be at the lower end of the 3-5% range. SBUX for FY 18, expects the consolidated revenue growth to be in the high single digits when excluding approximately 2 points of net favorability from the East China acquisition and other streamline-driven activities. In addition, the company for the full year 2018 expects non-GAAP earnings per share to be in the range of $2.40 to $2.42.


Store Data (Source: Company Reports)

Analysis and Stock Recommendation: SBUX has formed alliance with Nestle, which will add opportunity for presence in 189 countries. The company has undertaken three newer major digital initiatives, which are expected to contribute approximately 1-2% attributable comp in FY19. The company has also raised the target for cash returned to shareholders to $25 billion through FY20. In terms of liquidity, the quick and current ratios have improved. With consistent execution, the group may witness 2-3% growth in US same store sales. The group’s moving average has been decent around $55.75 for the year to date and the relative strength indicates for upwards movement while the stock respected the support level at $53. We give a “Buy” on the stock at the current price of $ 55.43 ahead of Q4 and Full Year Fiscal 2018 results due around November 1, 2018.
 

SBUX Daily Chart (Source: Thomson Reuters)

 
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