Starbucks (SBUX +1.44%) will announce its first-quarter results today after market hours. The company is coming off of a banner year, which CEO Howard Schultz described as "by far the best in Starbucks' 42-year history." The company's first-quarter performance will indicate whether or not 2014 could be even better.
Starbucks gave promising guidance when the company released its fourth-quarter 2013 results in October. Revenue growth and same-store sales growth are expected to increase at the same rate in 2014 as they did in 2013. Moreover, overall profitability is expected to increase by up to two percentage points in fiscal 2014. First-quarter earnings are expected to be between $0.67 and $0.69 per share.
| 2013 Results | 2014 Guidance | |
| Revenue Growth | 12% | 10%+ |
| Comps Growth | 7% | Mid-single-digit |
| Operating Margin | 17.6% |
19.1% to 19.6% |
Source: Starbucks fourth quarter 2013 earnings release
What to watch for
Many factors will determine whether or not Starbucks hits its revenue and profitability targets in 2014. The factors to watch for in the first-quarter results are store count, La Boulange roll-out in the United States, and growth in licensed stores. An additional external factor -- low coffee bean prices -- will have a beneficial impact on first-quarter results as well.
Global store count and the U.S. roll-out of La Boulange are the keys to Starbucks' revenue growth; new locations add to overall revenue while La Boulange will enhance same-store sales growth. Starbucks plans to add 1,500 stores in fiscal 2014, including 600 in the Americas and 750 in Asia. That would increase total store count by 11% in 2014 -- a huge increase for a company that already has a global footprint and nearly $12 billion in revenue. Look for management's comments about the expansion plans to ensure that store growth is on track.
Even more exciting than store growth is same-store sales growth. Increasing revenue per location makes each store more valuable. Company-operated stores in the Americas generate an average of $1.3 million in sales. Starbucks plans to increase that amount by widening its selection of food. At the end of fiscal 2013, the company had introduced La Boulange items, including sandwiches and baked goods, to nearly 3,300 stores. Starbucks plans to complete the roll-out to all of its U.S. stores by July.
Starbucks' attempt to draw more lunchtime customers could give a huge boost to U.S. same-store sales. Less than 6% of Starbucks' U.S. customers who visit during lunch hours buy lunch at the store. If Starbucks can become a place where people go to get their morning caffeine fix and a quick gourmet sandwich for lunch, it can significantly enhance its per-store revenue. Look for U.S. same-store sales growth to be at least 8% in the first quarter; anything less would be a slowdown in same-store sales growth compared to 2013 and an indication that the La Boulange roll-out is not drawing lunchtime customers.
The other side of the Starbucks growth story is profit growth. Look for the company to expand its operating margin in two ways during the first quarter: an increased mix of licensed stores and lower coffee bean prices. Licensed stores are similar to franchises in that they are operated by a third party and pay Starbucks a royalty. Licensed stores enable Starbucks to grow without having to make a significant investment. They also enable the company to collect an annuity-like stream of cash flows that go straight to the bottom line.
As of the end of fiscal 2013, 48% of Starbucks' stores are licensed. However, investors should expect this number to increase as its expansion efforts focus on Asia, where 77% of locations are licensed stores. This should help the company reach its goal of increasing its operating margin by 1.5 to 2 percentage points. Look for Starbucks' operating margin to come in above 17.6% and the mix of licensed stores to exceed 50% of total stores.
The final factor to watch for is the impact of coffee prices on the company's expenses. The price of arabica coffee beans declined from a peak of $2.82 per pound in April 2011 to $1.14 per pound in September 2013. Starbucks pays a higher price for its high-quality coffee beans, but its price is based on the commodity price. In fiscal 2013, Starbucks paid $2.36 per pound of coffee beans. In fiscal 2014, it expects to average $1.76 per pound. The lower price will lead to a $0.09 to $0.10 positive impact on earnings per share for the year.
Moreover, Starbucks locks in low prices through futures contracts. Look for management's commentary on securing new contracts for coffee beans at current low prices; the impact of low-priced futures contracts agreed to in the first quarter of 2014 will flow through to the bottom line in 2015.
Bottom line
Starbucks has had an incredible run over the last five years; it trades at more than seven times its 2009 low. The market expects the company to continue growing at a high rate, and any indication that growth is slower than anticipated will have a severe adverse effect on the stock price. Investors can be sure that the company is still on track if store openings proceed as scheduled, U.S. same-store sales grow 8% or more, the company's operating margin exceeds 17.6%, and it continues to lock in low coffee prices. Keep an eye out for each of those factors when Starbucks releases its results later today.
