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We take a look at one of the world's largest coffee chains (if not the largest), Starbucks, financial results for the 2nd quarter of their 2019 fiscal year as published on 25 April 2019. Sure our stock valuation is a little late. But better late than never.
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About Starbucks
While we are sure most readers will know exactly who Starbucks is and what they are about, we will provide some background information about the group and its history below. Most of the information below was obtained from Starbucks website and their annual reports.
Our story began in 1971. Back then we were a roaster and retailer of whole bean and ground coffee, tea and spices with a single store in Seattle’s Pike Place Market.Today, we are privileged to connect with millions of customers every day with exceptional products and more than 24,000 retail stores in 70 countries.
Back then, the company was a single store in Seattle’s historic Pike Place Market. From just a narrow storefront, Starbucks offered some of the world’s finest fresh-roasted whole bean coffees. The name, inspired by Moby Dick, evoked the romance of the high seas and the seafaring tradition of the early coffee traders. In 1981, Howard Schultz (Starbucks chairman and chief executive officer) had first walked into a Starbucks store. From his first cup of Sumatra, Howard was drawn into Starbucks and joined a year later. In 1983, Howard traveled to Italy and became captivated with Italian coffee bars and the romance of the coffee experience. He had a vision to bring the Italian coffeehouse tradition back to the United States. A place for conversation and a sense of community. A third place between work and home. He left Starbucks for a short period of time to start his own Il Giornale coffeehouses and returned in August 1987 to purchase Starbucks with the help of local investors. From the beginning, Starbucks set out to be a different kind of company. One that not only celebrated coffee and the rich tradition, but that also brought a feeling of connection.
Starbucks is named after the first mate in Herman Melville’s Moby Dick. Our logo is also inspired by the sea – featuring a twin-tailed siren from Greek mythology.Starbucks is named after the first mate in Herman Melville’s Moby Dick. Our logo is also inspired by the sea – featuring a twin-tailed siren from Greek mythology.
Our story began in 1971. Back then we were a roaster and retailer of whole bean and ground coffee, tea and spices with a single store in Seattle’s Pike Place Market.Today, we are privileged to connect with millions of customers every day with exceptional products and more than 24,000 retail stores in 70 countries.
Back then, the company was a single store in Seattle’s historic Pike Place Market. From just a narrow storefront, Starbucks offered some of the world’s finest fresh-roasted whole bean coffees. The name, inspired by Moby Dick, evoked the romance of the high seas and the seafaring tradition of the early coffee traders. In 1981, Howard Schultz (Starbucks chairman and chief executive officer) had first walked into a Starbucks store. From his first cup of Sumatra, Howard was drawn into Starbucks and joined a year later. In 1983, Howard traveled to Italy and became captivated with Italian coffee bars and the romance of the coffee experience. He had a vision to bring the Italian coffeehouse tradition back to the United States. A place for conversation and a sense of community. A third place between work and home. He left Starbucks for a short period of time to start his own Il Giornale coffeehouses and returned in August 1987 to purchase Starbucks with the help of local investors. From the beginning, Starbucks set out to be a different kind of company. One that not only celebrated coffee and the rich tradition, but that also brought a feeling of connection.
Starbucks is named after the first mate in Herman Melville’s Moby Dick. Our logo is also inspired by the sea – featuring a twin-tailed siren from Greek mythology.Starbucks is named after the first mate in Herman Melville’s Moby Dick. Our logo is also inspired by the sea – featuring a twin-tailed siren from Greek mythology.
- Starbucks went public on June 26, 1992 at a price of $17 per share (or $0.53 per share, adjusted for subsequent stock splits) and closed trading that first day at $21.50 per share.
- Starbucks was incorporated under the laws of the State of Washington, in Olympia, Washington, on Nov. 4, 1985.
- Starbucks Corporation's common stock is listed on NASDAQ, under the trading symbol SBUX.
So to the numbers we go
Below the highlights for the period under review as published by Starbucks (SBUX) in the financial release for the period.
So the above numbers were contained in SBUX's press release for the Q2 of their 2019 fiscal year. Below a few numbers that we are interested in as obtained from the financial results:
- Global comparable store sales increased 3%, driven by a 3% increase in average ticket
- Americas and U.S. comparable store sales increased 4%, driven by a 4% increase in average ticket
- China/Asia Pacific comparable store sales increased 2%, driven by a 2% increase in average ticket; China comparable store sales increased 3%, with comparable transactions down 1%
- The company opened 319 net new stores in Q2, yielding 30,184 stores at the end of the quarter, a 7% increase over the prior year. 94% of net new store openings were outside of the U.S. while 88% were licensed
- Consolidated net revenues of $6.3 billion grew 5% over the prior year
- Consolidated net revenues grew 9% over the prior year adjusted for approximately 3% of net reduction from Streamline-driven activities and a 1% headwind from unfavorable foreign currency translation
- Streamline-driven activities include the licensing of our CPG and foodservice businesses to Nestlé following the close of the deal on August 26, 2018, and the conversion of certain international retail operations from company-operated to licensed models
- GAAP operating margin, inclusive of restructuring and impairment charges, increased 80 basis points year-over-year to 13.6%, primarily due to lower restructuring and impairment charges, the beneficial impact of cost savings initiatives, sales leverage, and new revenue recognition accounting for stored value card (SVC) breakage, partially offset by Streamline-driven activities and partner (employee) and other strategic investments
- Non-GAAP operating margin of 15.8% declined 40 basis points compared to the prior year. Excluding an 80-basis point unfavorable impact from Streamline-related activities, non-GAAP operating margin expanded by approximately 40 basis points
- GAAP Earnings Per Share of $0.53, up 13% over the prior year
- Non-GAAP EPS of $0.60, up 13% over the prior year, including a $0.01 benefit from discrete income tax items
- The company returned $3.2 billion to shareholders through a combination of share repurchases and dividends
- Starbucks® Rewardsloyalty program grew to 16.8 million active members in the U.S., up 13% year-over-year
So the above numbers were contained in SBUX's press release for the Q2 of their 2019 fiscal year. Below a few numbers that we are interested in as obtained from the financial results:
- Total net venue for Q2:2019, $5.159 billion (up 6.9% from $4.828 billion in prior year)
- Operating income for Q2:2019, $857.7 million (up 11% from $772.5 million in the prior year)
- Net earnings for Q2:2019, $663.2 million (up 0.5% from $660.1 million in the prior year)
- Net earnings per common share, $0.53 (up 12.8% from $0.47 in the prior year). The strong increase in net earnings per common share while net earnings hardly grew over the previous period is due to the fact that the number of shares outstanding declined from 1.406 billion shares to 1.2507 billion shares due to a share repurchase program from the group
- Cash dividend per share for Q2:2019, $0.36 per share (up 20% from $0.30 in the prior year)
- Cash and cash equivalents: $2.055 billion or $1.64 a share
- Cash generated from operating activities: $2.21 per share
So any comments or guidance from management on the results?
The group released the following comments with their 2nd quarter earnings report regarding the guidance for the fiscal period ahead.
Fiscal 2019 Guidance
The company updates the following fiscal year 2019 guidance (all growth targets are relative to fiscal year 2018 non-GAAP measures unless specified):
Fiscal 2019 Guidance
The company updates the following fiscal year 2019 guidance (all growth targets are relative to fiscal year 2018 non-GAAP measures unless specified):
- Americas operating margin up slightly (previously down slightly)
- Channel Development operating margin in mid-30% range (previously high-30% range)
- GAAP tax rate in the range of 20% to 22% (previously 21% to 23%) and non-GAAP tax rate in the range of 19% to 21% (previously 20% to 22%)
- GAAP EPS in the range of $2.40 to $2.44 (previously $2.32 to $2.37)
- Non-GAAP EPS in the range of $2.75 to $2.79 (previously $2.68 to $2.73)
- Global comparable store sales growth between 3% and 4%
- Approximately 2,100 net new Starbucks stores globally
- Americas over 600
- CAP ~1,100 (nearly 600 in China)
- EMEA ~400 (virtually all licensed)
- Consolidated GAAP revenue growth of 5% to 7%
- Includes approximately 2% net negative impact related to Streamline-driven activities
- Consolidated operating margin down moderately
- CAP operating margin roughly flat
- EMEA operating margin improving over the course of 2019
- Capital expenditures ~$2.0 billion
Starbucks (SBUX) share price history chart
The graphic below shows Starbucks (SBUX) share price from 2007. And it has grown substantially over the last 12 years. And in recent times it has seen a strong increase in its share price which we believe is largely driven by their agressive share buy back program which will ensure future profits are shared between fever shareholders and shares which is leading to the increase in the Starbucks share price. Lets hope directors pay or bonuses are not linked to share price performance otherwise SBUX will be paying bonuses out of their ears
So should you buy Starbucks (SBUX) shares?
Well with their ever expanding number of retail outlets, their continued growth in China and Asia pacific and their already strong footprint in the USA and Europe on cannot help but be tempted to buy SBUX shares purely based on their global presence and their expanding presence across the globe. We cannot help but think continued growth for SBUX in future will come from buying out a few of the smaller competitors. We do see consolidation coming in the space they operate in. Their share buy back program will provide and has already provide future value for shareholders as future earnings and dividends are divided among fever shares (see above where we discuss the increase in net earnings per share while total earnings remained relatively flat for the group). With additional share buy backs this benefit will be amplified.
Starbucks Corporation (SBUX) valuation
With all things considered regarding their expansion plans, their share buy back program that is in full force and their current financial position, which includes a PE ratio around 40 and a dividend yield of around 1.7% our valuation models places a value of $76.96 on SBUX shares. We therefore belief the company shares are currently overvalued.
Investors who do not own Starbucks shares should consider buying SBUX shares at a price well below $77 if they want to maximize potential future gains from the stock. In November 2018 we valued the group at $69 a share, and the increased valuation in the group is largely driven by their strong share buy back program.
Investors who do not own Starbucks shares should consider buying SBUX shares at a price well below $77 if they want to maximize potential future gains from the stock. In November 2018 we valued the group at $69 a share, and the increased valuation in the group is largely driven by their strong share buy back program.