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.

Joseph Solitro
Joseph Solitro
Apr 28, 2014 at 2:12PM
Consumer Goods

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.

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:

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. 

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?

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.

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:

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.

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.