Coffee giant Starbucks (SBUX, Financial) recently reported its third quarter earnings beating Street estimates. The key highlight of the results was the 7% sales growth in U.S. comparable stores. The company displayed excellent performance with commendable operations across all segments despite increasing competition. Let’s take a closer look.
Operational Performance
Revenue during the period rose 11% to $4.2 billion. This is quite an impressive hike, particularly if we consider the increasing commodity prices. Prices of coffee have been rising in the past six months, which suggests hard time for companies like Starbucks and Keurig Green Mountain (GMCR, Financial) as they are heavily reliant on coffee for driving their revenue.
In fact, last year nearly three fourth of Starbucks’ retail revenue came from beverages. Knowing the adverse affect high coffee prices can have on its revenue, the Washington-based company hedged coffee prices, which undoubtedly gave it an advantage over fellow competitors.
Additionally, Starbucks increased the rates of its offerings to compensate for the rising coffee bean prices. Rates for some of the drinks were increased by $0.05 to $0.20, while prices of packaged coffee soar by a good 8% (which calculates to $1) to $9.99 a bag.
The coffee brewer’s top line growth was supported by its expansion into new markets, strengthening network, and heavy investment in new drive-through formats.
Moreover, better menu with greater variety also boosted revenue. And though competition for luring breakfast crowd is increasing from Dunkin’ Donuts (DNKN, Financial), Burger King (BKW, Financial), and McDonald’s (MCD, Financial), it could not shake Starbucks’ share. Starbucks’ breakfast segment reported a staggering growth of 40% during the quarter, while every other fast food chain was complaining of tightening contest in the early hours of the day.
Growing from Strength to Strength
The company opened as many as 344 new outlets worldwide, taking the total count to 20,863 in 64 nations. The operating margin for the quarter improved to 18.5% as Starbucks recorded an operating income of $769 million. Earnings per share beat the company’s own guidance by a cent and went up 22% to $0.67. It’s worth mentioning that the company’s smart move of hedging coffee prices paid off well in keeping profitability margins intact.
Also, the fact that the coffeehouse chain reported its 18th successive quarter of comparable store sales gain of 5% and more is noteworthy. Starbucks’ comparable store sales were not only impressive in the domestic market, but the company recorded encouraging numbers in China and Asia Pacific too, where comparable store sales went up 7%. The coffee maker is gaining ground in these emerging markets, which are getting stronger with each passing year.
Expectations Going Forward
In the present fiscal year, Starbucks aims to expand its net operating margin by 200 basis points in the current fiscal year. The company also targets to increase global consumer products division’s margin by 600 basis points. As a part of its aggressive expansion plan, the company is on track to open 1,550 new stores.
Parting Word
The third-quarter result is a good show of the company’s excellent work flow, greater understanding of customers’ requirement, and customer satisfaction. As a result, Starbucks enjoys unmatched consumer loyalty despite higher product prices than rivals. With a solid consumer base and effective expansion plan, the company looks poised to grow further.
