Company overview - Starbucks Corporation (Starbucks) is a roaster, marketer and retailer of coffee. As of October 2, 2016, the Company operated in 75 countries. The Company operates through four segments: Americas, which is inclusive of the United States, Canada, and Latin America; China/Asia Pacific (CAP); Europe, Middle East, and Africa (EMEA), and Channel Development. The Company's Americas, CAP, and EMEA segments include both company-operated and licensed stores. Its Channel Development segment includes roasted whole bean and ground coffees, Tazo teas, Starbucks- and Tazo-branded single-serve products, a range of ready-to-drink beverages, such as Frappuccino, Starbucks Doubleshot and Starbucks Refreshers beverages and other branded products sold across the world through channels, such as grocery stores, warehouse clubs, specialty retailers, convenience stores and the United States foodservice accounts.
 

SBUX Details
 
Revenue driven by new store openings: For Q3 Fiscal 2017, Starbucks Corporation (NASDAQ: SBUX) reported 8% year on year (yoy) growth in consolidated total net revenues at $5.7 billion, primarily driven by incremental revenues from 2,341 net new store openings and global comparable store sales growth of 4%. However, operating margin declined 110 basis points to 18.4%, primarily due to goodwill and store asset impairments, related to the change in strategic direction for Teavana-branded retail stores, which is part of all other segments. Additionally, operating margin decline was led by increased partner investments, largely in the Americas segment, partially offset by sales leverage. Accordingly, earnings per share decreased 8% to $0.47 from $0.51 in the pcp (prior corresponding period). The Americas segment continued to perform well in the third quarter, growing revenues by 10% to $4.0 billion, primarily driven by incremental revenues from 1,002 net new store openings and comparable store sales growth of 5%. Moreover, continued strength in all dayparts from the success of its iced beverages and food offerings contributed to the increase in comparable store sales. The American division operating income increased while operating margin declined 20 basis points to 24.4% from a year ago figure, primarily due to increased investments in store partners, a product mix shift towards food and higher commodity costs.


Consolidated statements of earnings in Millions; (Source: Company reports) 

Repositioning the EMEA (Europe, Middle East, and Africa) segment to a licensed model: In China/Asia Pacific segment, revenues grew by 9% to $841 million, primarily driven by incremental revenues from 1,056 net new stores and a 1% increase in comparable store sales, partially offset by unfavourable foreign currency translation. Operating income grew 22% to $224 million, while operating margin expanded 280 basis points to 26.6%. Notably, the overall operating margin expansion was primarily due to the transition to China's new value added tax structure. Further, higher income from its joint venture operations also contributed to operating margin growth.


Segment results for Third quarter in Millions; (Source: Company reports)

On the other hand, the company continues to execute on its strategy of repositioning the EMEA segment to a predominantly licensed model. As a result of this strategy, EMEA revenues declined $24 million (9%), primarily due to the absence of revenue related to the sale of Germany retail operations in the third quarter of fiscal 2016. Accordingly, operating margin declined 700 basis points to 3.9% primarily due to an impairment of goodwill for Switzerland market, which negatively impacted operating margin by 720 basis points. Channel Development segment revenues grew by 9% to $479 million, primarily driven by higher international sales, increased premium single-serve and packaged coffee products, and higher foodservice sales. Operating margin increased 130 basis points to 43.9% in the third quarter of fiscal 2017 primarily due to lower coffee costs and higher income from North American Coffee Partnership joint venture.

Total net revenues for the first three quarters of fiscal 2017 increased by $1.1 billion, due to increased revenues from company operated stores. The increase in company-operated store revenues was driven by an increase in incremental revenues from 832 net new Starbucks company-operated store openings over the period ($638 million) and 3% growth in comparable store sales ($397 million), contributed to a 4% increase in average ticket. However, the growth was partially offset by the absence of revenue from the conversion of certain company-operated stores to licensed ($115 million) and the impact of unfavourable foreign currency translation ($53 million).


Segment results for three quarters in Millions; (Source: Company reports)
 
To close all 379 Teavana Retail Stores: Many of the company’s principally mall-based Teavana retail stores have been persistently underperforming. Further, following a strategic review of the Teavana store business, despite efforts to reverse the trend through creative merchandising and new store designs, it expects that underperformance is likely to continue. As a result, Starbucks will close 379 Teavana stores over the coming year, with the majority closing by Spring 2018. However, the approximately 3,300 partners impacted by these closures will receive opportunities to apply for positions at Starbucks stores.


Store Data; (Source: Company reports)

Cash Flows: Cash flow from operating activities stood at $3.1 billion for the first three quarters of fiscal 2017, compared to $3.3 billion for the same period in fiscal 2016. The change was primarily due to the timing of cash payments for income taxes, partially offset by increased earnings. Cash used by investing activities for the first three quarters was at $670 million, compared to $1.6 billion for the same period in fiscal 2016, primarily due to lower purchases of investments as well as an increase in the sale of investments. Cash flow from financing activities for the first three quarters of fiscal 2017 totalled $1.8 billion, compared to $1.1 billion for the same period in fiscal 2016. The change was primarily due to lower proceeds from issuances of long-term debt, the repayment of the 2016 notes and an increase in cash dividends paid, partially offset by a decrease in share repurchases.

Evolution Fresh to offer 100% organic products by 2019:  Recently, Evolution Fresh (acquired by Starbucks in 2011) announced about its 2018 innovations with seven new organic smoothies that combine cold-pressed fruit and vegetable juice with probiotics, coconut milk and other functional ingredients. These new functional smoothies allow for market expansion beyond super-premium juice to include premium functional beverages. Evolution Fresh® Complete Smoothies are multifunctional beverages combining great taste with a day’s worth of probiotics (1 billion CFUs) to support digestive wellness, plant-based protein for satiety and fiber for digestion. As Evolution Fresh expands into the functional beverage category, the brand is also doubling down on its mission to source quality produce by offering 100% organic products by 2019. Moreover, the new Evolution Fresh® Daily Probiotic Smoothies and Complete Smoothies were crafted in response to increased consumer interest in gut health and healthy snacking.


Evolution Fresh All Smoothies – 2018; (Source: Company reports)
 
Financial Outlook for Fiscal 2017: After adjusting for the 2% of additional revenue attributable to the extra week in fiscal 2016 and the approximate 1% of anticipated unfavourable foreign currency translation for fiscal 2017, consolidated revenue growth is expected to be at the lower end of 8% to 10% range. Moreover, revenue growth for fiscal 2017 is expected to be driven by approximately 2,200 net new stores worldwide, comparable store sales and continued focus on operational excellence, product innovation and enhancing digital interactions with customers. Importantly, around 1,000 net new store openings will bein China/Asia Pacific segment, approximately 900 net new stores coming from the Americas segment and the remaining store growth from the EMEA segment. Global comparable store sales growth for the fourth quarter of fiscal 2017 is now expected to be in the range of 3-4%, which is consistent with the first three quarters of fiscal 2017. Accordingly, earnings per share is expected to be in the range of $1.96 to $1.97 for fiscal 2017. However, revenue growth and sales leverage are expected to be partially offset by investments in partners, as well as continued focus on product development and innovation, which includes the expansion of Starbucks Reserve® and Roastery businesses. For FY18, the company targets revenue growth at more than 10%, and earnings per share growth of 15% to 20% with mid-single digit comparable store sales growth.
 
Stock performance: The shares of Starbucks have declined about 7.9% in the last three months while being up about 3% in the past one year, owing to modest results. It is also noteworthy that the group’s dividend growth history has been decent. Given the ongoing restructuring of loss making segments and expansion of new stores in Asia and America with new product launches coupled with improving cash flows aided by cost reductions, we give a “Buy” recommendation on the stock at the current market price of $55.15
 

SBUX Daily Chart (Source: Thomson Reuters)
 

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