Starbucks Is Still Hot: Should You Buy?

Starbucks delivered lower-than-expected sales for the last quarter, but the company is still generating a steaming-hot performance for investors. Should you buy a cup of caffeinated profits for your portfolio?

Jan 24, 2014 at 6:00PM

Starbucks (NASDAQ:SBUX) reported earnings on Thursday. Even if sales were a bit below analysts' expectations, the company is still outperforming competitors like Dunkin' Brands (NASDAQ:DNKN) and Krispy Kreme (NYSE:KKD) by a considerable margin and delivering tasty profits for investors. Should you buy a cup of caffeinated profits for your portfolio?

Steaming profits
Revenues during the quarter ended on Dec. 29 came in at $4.2 billion, which was below analyst expectations of $4.3 billion but still a material increase of 12% versus the same quarter in the prior year. Same-store sales grew by 5% during the quarter, driven by a 4% increase in transactions and a 1% rise in the average ticket.

Net revenues in the Americas segment were $3.1 billion, a growth rate of 8% versus the prior year. The increase was driven by a 5% growth in comparable-store sales and 735 net store openings over the past 12 months. Analysts expected stronger comparable-store sales performance in the Americas, and this was probably the weakest spot in the report.

The company is still firing on all cylinders on a global scale, though: Net sales in the China/Asia-Pacific segment were $266.9 million, a whopping annual increase of 25%. Starbucks opened 672 new stores in the region and comparable-store sales increased by 8% versus the prior year. Sales in the EMEA region grew by 11% due to extra revenues from 157 new store openings and a 5% growth rate in comparable-store sales.

Operating income grew by 29% annually and operating margins increased by 260 basis points to 19.2% of sales. Earnings per share jumped by 25% to $0.71 per share. This figure was better than the average estimate of $0.62 per share for the quarter.

Performance in the Americas was a little softer than expected, but the company is doing better than fine thanks to strong growth in emerging markets and healthy profit margins. Besides, Starbucks raised its earnings guidance for the full year to between $2.59 and $2.67 per share versus a previous range of $2.55 to $2.65, so management seems to be quite confident about the company's prospects in the medium term.

One of a kind
Starbucks is a unique player in its industry. The company's brand value and differentiated customer experience generate superior pricing power for its products and higher-than-average profit margins for investors. In addition, the company stands out due to its innovative culture when it comes to launching new products, technological innovation, and expanding into new commercial channels.

Even if competitors like Dunkin' Brands and Krispy Kreme are smaller and have more room for growing their store bases without reaching market saturation point, Starbucks is still outperforming its peers, and that says a lot about the company's quality and competitive strengths.

Investors will get more up-to-date information from Dunkin' Brands when the company reports earnings for the fourth quarter of 2013 on Feb. 6. As of the third quarter, Dunkin' Brands seemed to be performing well but not as strongly as Starbucks: Total revenues during the third quarter of 2013 increased by 8.5% to $186.3, while diluted adjusted earnings per share grew by 10.8% to $0.41.

Krispy Kreme reported a 6.7% increase in revenues during the company's fiscal third quarter ended on Nov. 3 on the back of a 3.7% increase in comparable-store sales during the period. Net income was $6.8 million, or $0.09 per share, compared to $0.07 per share in the third quarter of 2012. Like Dunkin' Brands, Krispy Kreme is delivering sound performance, but still growing more slowly than Starbucks in spite of being a smaller player.

The three companies are trading at similar valuation levels; Starbucks carries a forward P/E ratio of 23 versus 25.7 for Dunkin' Brands and 25.2 for Krispy Kreme. Considering that Starbucks offers superior quality and competitive strengths compared to its competitors, paying an average valuation for a high-quality company seems like a convenient deal for investors.

Bottom line
Different companies in the consumer sector are experiencing lackluster growth rates lately. This includes general retailers like major department stores or gigantic fast-food chains like McDonald's. In this context, weaker-than-expected U.S sales from Starbucks are no reason to panic, especially considering that the company is still performing well around the globe and generating substantial profit growth for investors.  

Starbucks is a high-quality name delivering solid performance in a challenging environment and trading at a reasonable valuation. The coffee powerhouse looks well positioned to continue outperforming the market in the long term.

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Fool contributor Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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