CONCLUSION: Starbucks has written the book on service and hospitality in the QSR space, creating a worldwide brand (now 32,000 stores !) in the process, admirable on many levels. There is no reason we know of that the extraordinary performance will not continue to be the case. From the standpoint of investing in SBUX, the P/E of 28.8x expected earnings in the current year, and over 20x TTM EBITDA, now growing at 8-10% annually, seems to adequately value the equity in the next year or two. Longer term, if valuations in the general market hold up, SBUX, the stock, should do fine as it grows materially faster than the worldwide economy as a whole.
THE COMPANY: Starbucks began in 1985 and today is considered the premier roaster, marketer and retailer of specialty coffee in the world. Currently, Starbucks operates in 81 markets around the world. Besides coffee, Starbucks sells a variety of teas and other beverages as well as a variety of high-quality food items. In recent years about 20% of company operated locations has been food. Starbucks also sells their products through other channels such as licensed stores, grocery stores and other food service outlets through their global coffee alliance with Nestle’s S.A.
Starbucks has three operating segments: (A) the Americas which is inclusive of the U.S., Canada and Latin America, (B) International which is inclusive of China, Japan, Asia Pacific, Europe, Middle East and Africa, and (C) Channel Development. Revenue as a percentage of total net revenues for fiscal 2019 were as follows: Americas 69%, International 23% and Channel Development 8%.
DEVELOPMENT COMMENTARY: Total global store count increased 1,932 locations or 6.6% over fiscal year 2018. The greatest increase in company stores came from International markets, China in particular with 602 net new stores (629 opened and 27 closed) bringing the total there to 3,521. The Americas increased store count between 2018 and 2019 by 2.9% to 9,974. Licensed stores increased by 10.3%, with growth most notable in Korea, which added 103 net units to a total of 1,334, U.K adding 54 to total 707, Turkey adding 41 to 494, Indonesia adding 56 to 421 total, Philippines adding 37 to 397 total, and Thailand transferring 377 from the company to 392 total licensed at year end.
UNIT LEVEL ECONOMICS:
UNIT LEVEL ECONOMICS COMMENTARY: While we can calculate that the AUV, worldwide, for company operated locations is slightly under $1.4M, and the stores are very profitable to be sure, it is difficult to be precise about store level economics. Unit level results vary between markets that are spread worldwide, and licensing income and expenses come into play as the company reports by geographical segment. As a guide however, and using The Americas as the best indication, we provide the table above. Note that Cost of Goods include equipment and product sales to licensees so we calculate all expense lines against total net revenues which include license fees. With that in mind, CGS decreased in fiscal 2019 over fiscal 2018 by 90 basis point. Store Operating Expenses (including Labor and Benefit costs) increased by 110 basis points primarily driven by investments in the Labor content. On this basis, Approximate Store Level EBITDA was virtually flat at 26.6% of Total Net Revenues. It’s good to sell an addictive product 😊
SAME STORE SALES:
SAME STORE SALES COMMENTARY: 2019 global same store sales, as indicated above, increased by 5% in fiscal 2019 driven by 3% increase in average ticket and a 2% increase in comparable traffic. In ’19, SSS was 5% in the Americas (including 2% transaction growth), 3% International (1% transactions).
RECENT DEVELOPMENTS: (Per the year end earnings release and conference call) Noteworthy developments in the year ending 9/30/19, in addition to corporate growth in units and sales cited above, include: Active Starbucks’ Rewards membership in the US up 15% to 17.6M, returning $12B to shareholders in the form of dividends and share buybacks, benefit from the licensing of their CPG and foodservice to Nestle that was closed in late Aug.’18. Operating income in the Americas was up 5% YTY, 70 bp less than the prior year, with a 9% increase in revenues.This decreased operating margin was due to the Starbucks Leadership Experience, providing higher wages, benefits and labor hours, which was partially offset by cost savings initiatives and sales leverage. Internationally, Operating Income was up 18%, up 180 bp on a 6% increase in revenues. It was driven by 11% store growth, as well as cost savings and the conversion of certain retail business to licensed markets, partially offset by higher wages and an unfavorable product mix shift.
Fiscal 2020 guidance included global comp sales growth of 3-4%, about 2,000 new stores globally (1400 international plus 600 in the Americas), consolidated GAAP revenue growth of 6-8%, consolidated operating income growth of 8-10% (with obviously higher operating margin), an effective tax rate of 22-24%, GAAP EPS from $2.84-$.2.89 (non-GAAP from $3.00-$3.05), capex of about $1.8B. Interesting (to us, anyway) that Bloomberg, as shown in the template above, carries the non-GAAP estimate. Whatever happened to Generally Accepted Accounting Principles?
On the conference call: Management pointed out that the fourth quarter comp of 6% in the US included transaction growth of 3% and a two year comp of 10%. China, also, had a very strong Q4, with a 5% comp including transaction growth of 2% (which this year reversed previous slightly negative transaction counts) and a two year comp of 6%. Cold beverages are helping, with Nitro Cold Brew introduced in the US last summer and The Pumpkin Cream Cold Brew this past fall. The Reward Program now has over 10 million active members in China (up 45% YTY), on top of the 18M in the US, where the program is generating 42% of store revenues. Also in China, Starbucks is now delivering to over 3,000 stores, mobile orders amounted to 10% of sales with 7 points from Delivery (only 1% of sales in the US) and 3 points from pickup. In China also, perhaps driven by the competitive efforts of Luckin Coffee, a new Voice Ordering and Delivery by a “Tmall Genie” was introduced to enhance the mobile experience. Management also made the point that the Global Coffee Alliance, with Nestle, was EPS accretive in ’19, faster than originally expected. Overall, CEO, Kevin Johnson, summarized the strength of the Starbucks brand well. “Growth at Scale has really enabled us to ..differentiate Starbucks…the focus that we’ve put on the customer experience…the beverage innovation…..the digital customer relationships..executed with a discipline that has driven our customer connection scores to an all time high.” We have only touched on a small portion of the various operating initiatives taking place at this premier worldwide brand. Those of our readers that are interested can access the full conference call transcript at www.starbucks.com.
CONCLUSION: Provided at the beginning of this article