Starbucks Continues Its Record-Setting Pace. Should You Buy Now?

Starbucks has just released second-quarter results, so let's find out if we should be buying or selling on the news.

Apr 28, 2014 at 2:12PM

Starbucks (NASDAQ:SBUX), which is the largest chain of coffeehouses in the world, has just released second-quarter earnings and its stock has reacted positively to the results. Let's break down the report and the company's outlook on the rest of the year to determine whether we should be buying in right now or avoid it and go with a competitor like Dunkin' Brands (NASDAQ:DNKN) instead.

Olivewayexterior

Source: Starbucks

The record-setter
Starbucks' second-quarter report was released after the market closed on April 24 and the results were mixed compared to expectations. Here's a summary:

MetricReportedExpected
Earnings Per Share $0.56 $0.56
Revenue $3.87 billion $3.95 billion

Source: Benzinga

Earnings per share increased 17% and revenue increased 9.1% year-over-year, driven by growth in all three of Starbucks' major regions. Global comparable-store sales rose 6%, including incredible 6% growth in the Americas, 6% growth in Europe, the Middle East, and Africa, and 7% growth in China and the Asian Pacific. 

Images

Source: Starbucks' Twitter

Profitability was a bright spot for Starbucks as operating income increased 18.4% to $644.1 million. The company's operating margin showed great strength, expanding 130 basis points to 16.6%. These results allowed Starbucks to maintain its quarterly dividend of $0.26, which gives it a yield of about 1.5% at current levels. 

In terms of expansion, 335 net new stores were opened globally during the quarter to bring Starbucks' total count to 20,519. There have been 752 stores opened year-to-date, which puts the company on pace to achieve its goal of 1,500 new locations by the end of fiscal 2014.

Overall, it was a stunning quarter for Starbucks. Its stock reacted by rising just 0.51% in the trading session that followed, however. This appears to be a buying opportunity, but before we draw this conclusion, let's see what the company expects the rest of the year will hold.

Will growth accelerate in the second half?

Images

Source: Starbucks

Starbucks' strong second-quarter results allowed it to reaffirm its growth targets and raise its earnings per share guidance for fiscal 2014. The company now projects earnings per share in the range of $2.62-$2.68, versus previous estimates of $2.59-$2.67, and continues to expect the following:

  • Revenue growth of 10% or more
  • Global comparable-store sales in the mid single digits
  • Operating margin expansion of 175-200 basis points
  • Approximately 1,500 net new stores

These projections would result in another record-setting year for Starbucks and would support a substantially higher share price. With this being said, I believe that the lack of movement in its stock following the release was due to the weakness of the overall market, which makes for a picturesque buying opportunity.

Dnkn Company Website

Source: Dunkin Donuts

Does America really run on Dunkin'... or Starbucks?
Dunkin' Brands, the parent company of Dunkin' Donuts and Baskin-Robbins, released its first-quarter report just a few hours before Starbucks. Its results were not nearly as impressive, however. Here's an overview:

MetricReportedExpected
Earnings Per Share $0.33 $0.36
Revenue $171.90 million $172.66 million

Source: Benzinga

Dunkin's earnings per share increased 13.8% and revenue increased 6.2%. Comparable-store sales rose 1.2% at Dunkin' Donuts locations in the United States. All three of these statistics came in below analyst expectations.

Even though revenues were weak, profitability was strong, as operating income increased 7% to $75.6 million and the operating margin expanded 30 basis points to 44%. This enabled the company to repurchase approximately $22 million of its common stock during the quarter and maintain its quarterly dividend of $0.23. Also, it is worth noting that Dunkin' added 96 net new locations during the quarter, bringing its total store count to 18,254 between its two brands.

G

Source: Wikimedia Commons

Dunkin's Chief Executive Officer, Nigel Travis, was less than pleased with the quarterly performance and responded by stating, "We had a difficult first quarter with our comparable store sales growth in the U.S. significantly affected by severe weather in the regions of the country where most of our Dunkin' Donuts restaurants are located."

It is understandable that weather may have negatively affected Dunkin' since it has a large concentration of stores in the Northeast, but it still does not explain the massive difference in same-store sales growth seen by it and Starbucks. In fact, Starbucks' Chief Executive Officer, Howard Schultz, spoke directly on this topic in an interview with CNBC when he stated, "Despite the weather, no excuse whatsoever, a 6% comp in the U.S. was a stunning number." I agree with Mr. Schultz that weather should not be used as an excuse. Extremely cold weather would actually make a warm cup of coffee more desirable. 

With all of the information from the two reports in hand, it appears Dunkin' is losing its competitive edge. This may cause its shares to be very volatile in the coming weeks. For these reasons, I would avoid Dunkin' Brands until its next earnings release at the very least and would reiterate the idea of investing in Starbucks.

The Foolish bottom line
Starbucks is one of the most well-run companies in the world and its second-quarter earnings were a thing of beauty. The company is on a record-setting financial pace, but its stock has fallen over 7% in 2014; this makes it one of the most intriguing investment opportunities in the market today. Foolish investors should strongly consider initiating a long-term position right now, as I believe its growth and healthy 1.5% dividend could outperform the overall market for the next several years.

It's not coffee, but it can make you rich
Coffee is not going away, but cable sure is... Do you know how to profit from this change? There's roughly $2.2 trillion out there to be had and you need to do your best to get a piece of it. Click here for the names of companies you should be watching today. Hint: They're not Netflix, Google, and Apple. 

 

Joseph Solitro has no position in any stocks mentioned. The Motley Fool owns shares of 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers