Will Starbucks’ Rally Continue?

Starbucks (NASDAQ: SBUX  ) continues to extend its reach throughout the U.S and Asia and expand. The global coffeehouse chain is also increasing its revenue via collaborations with companies such as Green Mountain Coffee Roasters (NASDAQ: GMCR  ) .

Let's examine the company's performance in the past quarter and its potential growth in the near future. Let's also review its progress compared to its competitors such as Dunkin' Brands Group (NASDAQ: DNKN  )

Starbucks' growth in sales
In Starbucks' recent earnings report, the company's sales grew by 12.8%. Moreover, the company's operating profit spiked by 28.7%. How much of this growth in sales and profits was driven by better traffic or higher prices and how much was a result of more coffee shops opened? 

One of the main ways Starbucks is able to maintain its high revenue growth is by opening new coffee shops. In the fourth quarter (fiscal year), the company opened more than 1,700 locations (company-owned and franchised locations). The table below summarizes the company's performance in the past quarter. 

Source: Starbucks' website

As you can see, most of Starbucks' revenue growth was generated from opening restaurants (9.4%), while sales per store grew by only 3.1%. In other words, nearly three-quarters of the company's growth in sales came from new restaurants and the remainder from an increase in revenue per restaurant.

Therefore, if the company slows its growth in number of locations, this will have a severe impact on revenue. For next year, the company expects to open 1,500 new locations -- nearly half of them in Asia. This is 200 fewer stores to be opened compared to 2013, but Starbucks is likely to maintain a double-digit growth rate in revenue. 

The two main regions that expanded during the past quarter were Asia (mainly China) and North America.

Source: Starbucks' website

In terms of growth in sales, the Asia/China region is leading the way with 29% growth. Even after controlling the number of new stores opened, the company's revenue per stores rose by nearly 10% -- the highest growth rate versus any other region. Don't let the relatively low sales-per-store revenue in Asia fool you; this region is the most profitable -- with a profit margin of 38%. In comparison, Starbucks' profitability in the U.S is "only" 24%.

If Starbucks continues to expand at such a fast pace in China, its profitability will also improve. In 2013, the company opened 588 stores. In 2014, it plans to open 750. This means, Starbucks plans to grow at a faster pace in Asia next year. The company's situation could also improve if China moves forward and frees the yuan. In such an event, the yuan is likely to depreciate against the US dollar, which will also positively affect the company's revenue from China. 

Moreover, the company's least profitable region is the EMEA. This region is also growing the least. Therefore, this region's impact on revenue and profit margin will diminish over time. 

Besides regional growth, Starbucks is also making great strides by collaborating with Green Mountain Coffee Roasters, a leader in specialty coffee and coffeemakers.

The companies have expanded their agreement so that Green Mountain Coffee Roasters will manufacture, market, distribute, and sell Starbucks single-serve packs for use in Green Mountain Coffee Roasters' Keurig single-serve brewing systems worldwide.

Due to this collaboration, which started in March 2011, Starbucks was able to sell more than 850 million Starbucks coffee K-Cup packs. There are even talks that both companies might collaborate again to enter the carbonated beverage market. But it's too early to act on these talks. 

How is Starbucks doing compared to its peers?
One of Starbucks' competitors, Dunkin' Brands, hasn't done much better.

Dunkin' Brands expanded its revenue by opening new locations and improving its organic growth per store. In the third quarter, the company's sales rose by 8.5%; nearly half of the growth came from opening new locations. Despite the lower growth rate, Dunkin' Brands' operating profit is much higher than Starbucks'.

Source: Dunkin' Brands website

Dunkin' Brands' international segment is also growing faster than the U.S segment, but the international segment is less profitable. Therefore, Dunkin' Brands' profit margin might diminish over time, if it continues to expand outside the U.S. 

Bottom line
Starbucks continues to make great strides and most of its growth continues to come from opening new stores. The company continues to focus on Asia; this is likely to improve not only its revenue but also its profit margin. Finally, Starbucks' collaborations with leading brands such as Green Mountain Coffee Roasters are also likely to benefit the company in maintaining its revenue growth and improving its brand name.

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