What's Not to Love at Starbucks?

On Oct. 30 after the market closed, Starbucks (NASDAQ: SBUX  ) reported earnings that fell short of analyst expectations, not in terms of earnings, but in terms of outlook. As a result of this negative news, shares of the company fell by as much as 2.5% in after-hours trading.

Admittedly, it should be normal for a company's share price to respond negatively to lackluster earnings, but did Mr. Market overreact this time around? To assess whether or not this is the case, one must dig into the release to see if investors are, or are not, overreacting to the news and how the coffee juggernaut is positioned against rival Dunkin' Brands Group (NASDAQ: DNKN  )

High expectations
For the company's fourth quarter, revenue was expected to come in at $3.8 billion, an increase of 13.3% from the same quarter a year ago which saw revenue of $3.36 billion. In addition to a significant increase in revenue, analysts expected the company to grow its earnings per share for the quarter from $0.46 to $0.60, an increase of 30.4%. Such a significant rise in earnings would indicate full-year earnings per share of around $2.23.

Explosive results
Much to the surprise of analysts, Starbucks blew away expectations with earnings per share coming in at $0.63 (for a growth rate of 37%) for the quarter. However, if you take away the company's $0.03 per share from a one-time gain which resulted from the sale of equity of a Starbucks joint venture in Chile and Argentina, earnings were in-line with expectations. Likewise, earnings per share for the year came in at $2.26, just 1.3% above analyst estimates.

Additionally, the company reported third-quarter revenue of $3.8 billion, which was in line with analyst estimates. This gain in revenue came about as a result of two primary factors; a growth in store count and an increase in same-store sales.

When looking at the first factor, we see that the company added 1,701 stores for the year, up 9.4% from 18,066 locations in 2012 to 19,767 locations in 2013. To put this in perspective, the company saw its number of stores in operation increase by almost 4.7 per day across the globe. Of this growth, 32.8% (or 558 net new additions) took place in the fourth quarter of this year.

Most of this growth during the past quarter took place in its Americas segment, which saw the addition of 340 stores. This was 32.8% higher than the 256 additions made in the same quarter a year ago.  Additionally, it represents approximately the same growth as the number of stores opened by Dunkin.  For its most recent quarter compared to the same quarter a year ago, Dunkin' saw its U.S. stores rise by 371, net of any closures. 

The company's China/Asia Pacific segment also grew at a reasonable clip, adding 197 locations this quarter compared to 132 last year. The company fell somewhat short with its EMEA (Europe, Middle East, and Africa) segment, which saw only 28 net new additions this quarter, 15.2% lower than the 33 it reported last year. Similarly, the company's other segment closed down seven locations, compared to six net closings last year.  In comparison, Dunkin' has been struggling abroad as demonstrated by its closing of a small number of locations in its international markets, partially offset by store count rising in Germany and the Middle East.

The second factor behind the company's improved revenue and earnings per share was the fact that same-store sales increased at a good clip. Across all segments, on average, same-store sales grew by 7%. Fortunately, most of this growth in same-store sales (5% of it) came about as a result of increased traffic, while the remaining 2% arose from an increase in check size.  In comparison, Dunkin' saw its same-store sales rise by 4.2% in the United States, partially offset by a 1.4% decline in its same-store sales internationally.

In the company's Americas segment, the results were exactly the same as its entire business in regards to same-store sales growth. However, the United States alone outpaced the rest of the pack with same-store sales of 8%, driven primarily by increased traffic and a 2% increase in costs.

Despite seeing store count in its EMEA segment increase at a slow pace, same-store sales stayed flat as store traffic increased by 2% which was offset by a 2% decline in check size. In the company's China/Asia Pacific segment, same-store sales fared the best with a 9% increase. While 2% of this was attributable to an increase in check size, the remaining 7% was attributable to an increase in traffic.

Foolish takeaway
Although Starbucks reported very strong numbers for this quarter as well as its entire 2013 fiscal year, shares of the company still maintained a modest loss after hours. Yes, it is true that the company expects that it will only add around 1,500 locations globally, down 11.8% from this year's growth, but revenue is expected to rise by at least 10%. Earnings per share will likely come in somewhere between $2.55 and $2.65 for an increase of between 12.8% and 17.3%. This would, in turn, place a price/earnings, or P/E, ratio on the company between 29.7 and 30.9.

In truth, such a high P/E makes the company expensive. However, the long-term investor should bear in mind the fact that this is a company that has, historically, grown at a very fast rate and that offers high quality products in a relatively immature market.  As such, growth will likely take place at a reasonable rate while providing the Foolish investor with the chance to have a piece in a strong, profitable enterprise. 

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