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Starbucks After Earnings: More Room for Growth

Source: Starbucks.

On Friday, Starbucks (NASDAQ: SBUX  ) reported earnings for the quarter ended on March 30, and performance was remarkably strong, especially in comparison to the numbers reported by competitor Dunkin' Brands (NASDAQ: DNKN  ) for the same period. Even better, on a forward-looking basis, Starbucks looks strongly positioned for growth over years to come.

Hot performance in a cold environment
Total sales grew by 9% to $3.9 billion during the quarter, as global comparable-store sales increased by 6% and the company opened 335 new stores during the quarter for a total of 20,519 stores on a global scale at the end of the period.

Performance was strong across different geographies, comparable sales in both the Americas and EMEA grew by 6% during the quarter, and the China/Asia-Pacific region delivered an increase of 7% in comparable-store sales. Channel development sales grew by 10% during the quarter.

All of the company's reportable segments produced increases in profitability, and overall operating margin expanded by 130 basis points to 16.6% of sales. Earnings per share excluding a nonroutine gain in the prior year increased by 17% to $0.56 during the quarter.

Management is expecting sales during fiscal 2014 to increase by 10% on the back of a mid-single-digits increase in comparable-store sales and approximately 1,500 new store openings. Starbucks also raised earnings guidance for the year to between $2.62 and $2.68 per share, versus a previous guidance in the range of $2.59 to $2.67.

The numbers look quite strong, especially considering the challenging environment affecting the industry lately. Rival Dunkin' Brands reported earnings on April 24, and the company is no match to Starbucks when it comes to financial performance.

Dunkin' Brands delivered a total increase of 6.2% in revenues during the quarter ended on March 29 to $171.9 million. Performance in Dunkin' Donuts U.S. was quite disappointing, though, with an increase of only 1.2% in comparable-store sales during the quarter, which management attributed to harsh weather conditions.

Dunkin' Brands is particularly concentrated in the Northeast region, so there are valid reasons to believe that the weather was especially problematic for the company over the last several months. Still, this makes Starbucks look even stronger in comparison, as the company is demonstrating its ability to generate solid performance under difficult conditions for the industry.

A steaming-hot future
Even in the U.S., where the company has reached a significant level of market penetration, Starbucks is generating solid growth, with same-store sales increasing by 6% during the quarter, and this is a very healthy sign for the company when it comes to evaluating demand strength.

In the China/Asia-Pacific region, where the company has abundant room for store base expansion, total sales jumped by a remarkable 24% to $265.3 million during the quarter, so Starbucks is far from reaching saturation point.

From the earnings conference call:

Despite currently operating over 20,000 Starbucks stores in 64 countries, our research clearly demonstrates that Starbucks still accounts for very small share of total global coffee occasions and that we are significantly under-stored in many markets, including North America, China, Brazil and India, today our fastest growing international markets.

Besides, menu innovation is a considerable growth driver for Starbucks, and the company is leveraging recent acquisitions, such as Evolution Fresh, La Boulange, and Teavana, to expand its portfolio of offerings.

Starbucks has been experimenting lately with cold carbonated drinks via its Fizzio machine in select markets in the U.S. and Asia. Management described the experience as "an overwhelming success," so the company will be rolling out Fizzio in 3,000 stores across different countries.

According to Israeli business publication Globes, Starbucks is in advanced talks to purchase 10% of home soda pioneer SodaStream (NASDAQ: SODA  ) for $1.1 billion. There has been no confirmation or denial by the companies, and it's hard to tell at this stage if such a deal is likely to go through or not.

But SodaStream is making big inroads in the home-soda category while gaining rapid acceptance from customers and business partners, so a deal with SodaStream could fit quite well into the multiproduct and multichannel strategy for growth being implemented by Starbucks.

SodaStream would unquestioningly have a lot to gain by partnering with such a popular and recognizable brand as Starbucks, so partnership between Starbucks and SodaStream sounds like a convenient move for both companies.

Starbucks has also moved beyond the testing phase with its evening offerings, which includes wine and beer in combination with more sophisticated food items. The company is advancing with the rollout of its evening offerings over the coming years, and management believes that more than 1,000 Starbucks stores across the U.S. will include such offerings in the medium term.

Increasing sales in the evenings could provide a big boost not only to sales but also to profit margins, as it would allow for growing sales without any big investments in new stores.

Foolish takeaway
The latest earnings report form Starbucks confirms that demand remains quite strong for the company, and the coffee powerhouse still has a lot of room for store base expansion. In addition, menu innovation and expansion into new categories bode remarkably well when it comes to growth opportunities. Starbucks is well positioned for caffeinated growth in the years ahead.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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