Starbucks (SBUX 1.60%), the worldwide coffee retailer, reported fourth-quarter results for fiscal 2013 on Oct. 30. The company beat on the bottom line, but narrowly missed on the top line and gave guidance below analyst expectations. The stock has been volatile since then, so let's take a look to see if we should be buying on any weakness or if we should wait for a larger pullback to initiate a position.
Record results
Fourth-quarter results were mixed compared to analyst estimates:
| Metric | Reported | Expected |
|---|---|---|
| Earnings per Share | $0.63 | $0.60 |
| Revenue | $3.80 billion | $3.81 billion |
Starbucks' earnings per share grew 37% and revenue rose 12.8% year over year, while its operating margin expanded 220 basis points to 17.6%. Global same-store sales grew a strong 7% in the quarter, including 8% in the Americas, due to a 5% increase in customer traffic. The increased free cash flow allowed Starbucks to raise its quarterly dividend by 24% to $0.26, resulting in an annual yield of roughly 1.28% at current levels. Another record-setting quarter and dividend hike is just about all investors could have asked for out of Starbucks, and that is exactly what was delivered.
2013 and 2014
Results for fiscal 2013 were also released on Oct. 30. Just like the quarterly results, they set a record. In total, the company opened 1,701 net new stores, which brought its worldwide total to 19,767. Here are the results compared to fiscal 2012:
| Metric | 2013 | 2012 | % Change |
|---|---|---|---|
| Earnings per Share | $2.26 | $1.79 | 26.3% |
| Revenue | $14.9 billion | $13.3 billion | 12% |
| Operating Income | $2.46 billion | $1.99 billion | 23.1% |
Management also announced its 2014 outlook in the report, calling for earnings per share to be between $2.55 and $2.65, 10% or greater revenue growth, and the opening of 1,500 net new stores. Although this would amount to another record-setting year for Starbucks, the outlook fell short of analyst estimates and caused the volatility seen in the stock in after-hours trading and at the open on Oct. 31. This is where investors need to draw their own conclusions and realize the value behind what Starbucks is projecting.
Competitor results
Dunkin' Brands (NASDAQ: DNKN) and McDonald's (NYSE: MCD), two of Starbucks' direct competitors, have already reported earnings this quarter. Dunkin' reported earnings growth of 10.8% and revenue growth of 8.5% year over year, while its operating margin expanded 310 basis points to 44.1%. The company's most impressive metric was net income, which grew by 36.2% to $40.2 million.
Although this may seem like a strong group of statistics, it did not meet analysts' expectations, and the stock fell by 5% during the next trading session. I do not think the sell-off was warranted. It's a great company, so take a look at this one if you are not sold on Starbucks.
Source: Yahoo! Finance.
McDonald's reported earnings growth of 6% and revenue growth of 2% year over year, but these positives were far outweighed by the negatives. The major negative was the monthly same-store sales results; global same-store sales for September fell 0.1% versus estimates, which called for an increase of 1.3%. Also, same-store sales for the third quarter rose 0.9% compared to estimates of 1%.
Management expects October same-store sales to remain relatively flat, which did not help McDonald's case for being a value play. McDonald's has not shown much strength in 2013, so I would stay away from this one until it starts reporting positive results and exceeding same-store sales estimates.
The Foolish bottom line
Starbucks is a "best of breed" company showing incredible strength in a growing industry. It has been reporting record-setting quarter after record-setting quarter, and I do not think this trend will be broken in 2014. It still offers tremendous growth and it will provide additional returns through dividends and share repurchases. Investors should watch this one closely and consider buying on any weakness or significant pullback.
