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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 4th quarter as well as their full year financial results as published on the 1st of November 2018
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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
Q4 Fiscal 2018 Highlight
Fiscal Year 2018 Highlights
So the above numbers were contained in SBUX's press release for the Q4 and Full year results. Below a few numbers that we are interested in as obtained from the financial results:
- Global comparable store sales increased 3%, driven by a 4% increase in average ticket
- Americas and U.S. comparable store sales increased 4%
- CAP and China comparable store sales increased 1%
- Consolidated net revenues of $6.3 billion, up 11% over the prior year
- Adjusted for an approximately 2% net benefit from streamline-driven activities, and approximately 1% headwind from unfavorable foreign currency translation, consolidated net revenues grew 9% over the prior year
- Streamline-driven activities include the consolidation of the acquired East China business, partially offset by licensing our CPG and foodservice businesses to Nestlé following the close of the deal on August 26, 2018, Teavana mall store closures, and the conversion of certain international retail operations from company-owned to licensed models
- GAAP operating margin, inclusive of restructuring and impairment charges, declined 270 basis points yearover-year to 15.2%
- Non-GAAP operating margin of 18.1% declined 190 basis points compared to the prior year
- GAAP Earnings Per Share of $0.56, up 4% over the prior year ◦ Non-GAAP EPS of $0.62, up 13% over the prior year
- Starbucks RewardsTM loyalty program grew to 15.3 million active members in the U.S., up 15% year-over-year
- Mobile Order and Pay represented 14% of U.S. company-operated transactions
- The company opened 604 net new stores in Q4 and now operates 29,324 stores across 78 markets
- The company returned $3.6 billion to shareholders through a combination of dividends and share repurchases
Fiscal Year 2018 Highlights
- Global comparable store sales increased 2%, driven by a 3% increase in average ticket
- Americas and U.S. comparable store sales increased 2%
- CAP comparable store sales increased 1%
- China comparable store sales increased 2%
- Consolidated net revenues of $24.7 billion, up 10% over the prior year
- Adjusted for an approximately 2% net benefit from streamline-driven activities, and approximately 1% benefit from favorable foreign currency translation, consolidated net revenues grew 8% over the prior year
- Streamline-driven activities include the consolidation of the acquired East China business, partially offset by Teavana mall store closures, the conversion of certain international retail operations from company-owned to licensed models, licensing our CPG and foodservice businesses to Nestlé following the close of the deal on August 26, 2018, and the sale of our Tazo brand in Q1 FY18
- GAAP operating margin, inclusive of restructuring and impairment charges, declined 280 basis points yearover-year to 15.7%
- Non-GAAP operating margin of 18.0% declined 170 basis points compared to the prior year
- GAAP Earnings Per Share of $3.24, up 64% over the prior year
- Non-GAAP EPS of $2.42, up 17% over the prior year
- The company returned $8.9 billion to shareholders through a combination of dividends and share repurchases
So the above numbers were contained in SBUX's press release for the Q4 and Full year results. Below a few numbers that we are interested in as obtained from the financial results:
- Total net venue for Q4:2018, $6.303 billion (up 10.6% from $5.7 billion in prior year)
- Operating income for Q4:2018, $956.6 million (down -6.4% from $1.02 billion in the prior year)
- Net earnings for Q4:2018, $755.8 million (down -4.1% from $788.5 million in the prior year)
- Net earnings per common share, $0.56 (up 3.7% from $0.54 in the prior year). The increase in net earnings per common share while net earnings declined from the previous period is due to the fact that the number of shares outstanding declined from 1.45 billion shares to 1.348 billion shares due to a share repurchase program from the group
- Cash dividend per share for Q4:2018, $0.36 per share (up 20% from $0.30 in the prior year)
- Cash and cash equivalents: $8.7 billion (up from $2.46 billion in the prior year) , or $6.45 a share
- Cash generated from operating activities: $3.33 per share
So any comments or guidance from management on the results?
The group released the following comments with their 4th quarter earnings report.
“Starbucks record Q4 performance reflected meaningful improvement in virtually every critical operating metric compared to Q3," said Kevin Johnson, ceo. “As we enter fiscal 2019, we are executing against a clear growth agenda, with a focus on our long-term growth markets of the U.S. and China. We are also excited about the long-term growth potential of our new Global Coffee Alliance with Nestlé. I’m incredibly proud of our 350,000 Starbucks partners around the world and pleased with the continued progress in our growth agenda.”
“Starbucks record Q4 performance reflected meaningful improvement in virtually every critical operating metric compared to Q3," said Kevin Johnson, ceo. “As we enter fiscal 2019, we are executing against a clear growth agenda, with a focus on our long-term growth markets of the U.S. and China. We are also excited about the long-term growth potential of our new Global Coffee Alliance with Nestlé. I’m incredibly proud of our 350,000 Starbucks partners around the world and pleased with the continued progress in our growth agenda.”
“In Q4, Starbucks delivered improved sequential results in both our Americas and China/Asia Pacific segments. We also further set the stage for increased benefits from our ongoing efforts to streamline the company,” said Scott Maw, cfo. “Each of these factors contributed to the record Q4 results we reported today and position us well for fiscal 2019 and beyond. As always, credit for Starbucks performance belongs to our store partners all around the world who proudly wear the green apron and deliver an elevated Starbucks Experience to our customers, every day.
Fiscal 2019 Targets
The company introduces the following fiscal year 2019 targets:
• Expects to add approximately 2,100 net new Starbucks stores globally
• Expects global comparable store sales growth near the lower end of our current 3% to 5% range
• Expects consolidated revenue growth of 5% to 7%
• Includes approximately 2% net negative impact related to streamline-driven activities
• Expects GAAP EPS in the range of $2.32 to $2.37 and non-GAAP EPS in the range of $2.61 to $2.66
Company updates
• In August, Starbucks began licensing its consumer packaged goods and foodservice businesses to Nestlé. The two companies will work closely together on the existing Starbucks range of roast and ground coffee, whole beans, single-serve, and instant coffee offerings. The Alliance will also capitalize on the experience and capabilities of both companies to bring new product offerings for coffee lovers globally.
• In August, the company announced a strategic partnership with Alibaba Group Holding Ltd. that will enable a seamless Starbucks Experience and transform the coffee industry in China. Collaborating across key businesses within the Alibaba ecosystem, including Ele.me, Hema, Tmall, Taobao and Alipay, Starbucks announced plans to pilot delivery services beginning September 2018, establish “Starbucks Delivery Kitchens” for delivery order fulfillment and integrate multiple platforms to co-create an unprecedented virtual Starbucks store – an unparalleled and even more personalized online Starbucks Experience for Chinese customers.
• In October, Starbucks announced Patrick Grismer has been appointed executive vice president and chief financial officer (cfo) effective November 30. Reporting to Kevin Johnson, Starbucks president and chief executive officer, Grismer succeeds Scott Maw, who will retire on November 30. Grismer joins Starbucks from his current position as cfo of Hyatt Hotels Corporation, which he has held since joining the company in March 2016. In this role, he was responsible for all facets of the global finance function, as well as corporate strategy, asset management, construction, procurement, and shared services.
• In October, the company announced its intention to fully license Starbucks operations in France, the Netherlands, Belgium, and Luxembourg to its longstanding strategic partner Alsea, S.A.B. de C.V., the largest independent chain restaurant operator in Latin America. Under the proposal, which is subject to relevant local laws, Alsea will have the rights to operate and develop Starbucks stores in these markets, building on Starbucks regional growth agenda that drives value through strategic licensed relationships. Starbucks also announced plans to introduce a new support structure in its head office in London to better serve an increasingly licensed strategy.
• In response to critically low coffee prices in Central America, Starbucks announced a commitment of up to $20 million to temporarily relieve impacted smallholder farmers with whom Starbucks does business, until the coffee market self-corrects and rises above the cost of production. These funds will go directly to smallholder farmers in Nicaragua, Guatemala, Mexico and El Salvador to subsidize farmer income during the upcoming harvest season in Central America.
• In September, Starbucks celebrated its expansion into Italy - the company's 78th market - by opening the Starbucks Reserve Roastery in Milan. Milan marks the first time Starbucks has established its retail presence in a new market with the Roastery format, of which only two others exist in the world: the Seattle Roastery, which opened in 2014, and the Roastery in Shanghai, which debuted in 2017. Following the opening of the Roastery, Starbucks will bring additional cafés to Milan with licensed partner Percassi beginning in late 2018.
• The company’s Board of Directors authorized an additional 120 million shares for repurchase under its ongoing share repurchase program.
• As part of the company's previously announced plan to return $25 billion to shareholders in the form of share buybacks and dividends through fiscal 2020, Starbucks announced that it is currently executing a $5 billion accelerated share repurchase program (ASR) of the Company’s common stock with the assistance of two financial institutions. The Company used proceeds from the recently completed transaction with Nestlé S.A. to execute the ASR, effective October 1, 2018."
So a lot of updates from the group and their focus will remain on expanding their footprint and continuing to buy back shares, which in the long run will provide great value to shareholders as future earnings and dividends are shared among less shares.
Fiscal 2019 Targets
The company introduces the following fiscal year 2019 targets:
• Expects to add approximately 2,100 net new Starbucks stores globally
• Expects global comparable store sales growth near the lower end of our current 3% to 5% range
• Expects consolidated revenue growth of 5% to 7%
• Includes approximately 2% net negative impact related to streamline-driven activities
• Expects GAAP EPS in the range of $2.32 to $2.37 and non-GAAP EPS in the range of $2.61 to $2.66
Company updates
• In August, Starbucks began licensing its consumer packaged goods and foodservice businesses to Nestlé. The two companies will work closely together on the existing Starbucks range of roast and ground coffee, whole beans, single-serve, and instant coffee offerings. The Alliance will also capitalize on the experience and capabilities of both companies to bring new product offerings for coffee lovers globally.
• In August, the company announced a strategic partnership with Alibaba Group Holding Ltd. that will enable a seamless Starbucks Experience and transform the coffee industry in China. Collaborating across key businesses within the Alibaba ecosystem, including Ele.me, Hema, Tmall, Taobao and Alipay, Starbucks announced plans to pilot delivery services beginning September 2018, establish “Starbucks Delivery Kitchens” for delivery order fulfillment and integrate multiple platforms to co-create an unprecedented virtual Starbucks store – an unparalleled and even more personalized online Starbucks Experience for Chinese customers.
• In October, Starbucks announced Patrick Grismer has been appointed executive vice president and chief financial officer (cfo) effective November 30. Reporting to Kevin Johnson, Starbucks president and chief executive officer, Grismer succeeds Scott Maw, who will retire on November 30. Grismer joins Starbucks from his current position as cfo of Hyatt Hotels Corporation, which he has held since joining the company in March 2016. In this role, he was responsible for all facets of the global finance function, as well as corporate strategy, asset management, construction, procurement, and shared services.
• In October, the company announced its intention to fully license Starbucks operations in France, the Netherlands, Belgium, and Luxembourg to its longstanding strategic partner Alsea, S.A.B. de C.V., the largest independent chain restaurant operator in Latin America. Under the proposal, which is subject to relevant local laws, Alsea will have the rights to operate and develop Starbucks stores in these markets, building on Starbucks regional growth agenda that drives value through strategic licensed relationships. Starbucks also announced plans to introduce a new support structure in its head office in London to better serve an increasingly licensed strategy.
• In response to critically low coffee prices in Central America, Starbucks announced a commitment of up to $20 million to temporarily relieve impacted smallholder farmers with whom Starbucks does business, until the coffee market self-corrects and rises above the cost of production. These funds will go directly to smallholder farmers in Nicaragua, Guatemala, Mexico and El Salvador to subsidize farmer income during the upcoming harvest season in Central America.
• In September, Starbucks celebrated its expansion into Italy - the company's 78th market - by opening the Starbucks Reserve Roastery in Milan. Milan marks the first time Starbucks has established its retail presence in a new market with the Roastery format, of which only two others exist in the world: the Seattle Roastery, which opened in 2014, and the Roastery in Shanghai, which debuted in 2017. Following the opening of the Roastery, Starbucks will bring additional cafés to Milan with licensed partner Percassi beginning in late 2018.
• The company’s Board of Directors authorized an additional 120 million shares for repurchase under its ongoing share repurchase program.
• As part of the company's previously announced plan to return $25 billion to shareholders in the form of share buybacks and dividends through fiscal 2020, Starbucks announced that it is currently executing a $5 billion accelerated share repurchase program (ASR) of the Company’s common stock with the assistance of two financial institutions. The Company used proceeds from the recently completed transaction with Nestlé S.A. to execute the ASR, effective October 1, 2018."
So a lot of updates from the group and their focus will remain on expanding their footprint and continuing to buy back shares, which in the long run will provide great value to shareholders as future earnings and dividends are shared among less shares.
So should you buy their 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 future value for shareholders as future earnings and dividends are divided among fever shares. The net benefit of the share buy back program can already be seen with net earnings declining but per share earnings and the dividends per share increasing. With additional share buy backs this benefit will be amplified.
Starbucks Corporation valuation
With all things considered regarding their expansion plans, their share buy back program and their current financial position, which includes a PE ratio in the high 20's, with it currently sitting at around 28 and a dividend yield of around 2% our valuation models places a value of $69 on SBUX shares. We therefore belief the company shares are close to full value and investors who do not own the shares should consider buying SBUX shares at a price well below $69 if they want to maximize potential future gains from the stock.