One of my favorite consumer companies reported its third-quarter results last week amid high expectations. If you have followed my articles over the last year, you would be fully aware of the love I’ve held for Starbucks Corporation (NASDAQ:SBUX), both as a stock and as a mobile office in my case. Shares soared over 7.5% to an all-time high following what was a spectacular quarter on every imaginable metric. I was a bit taken back with such a move after the incredible run to the upside over the past few weeks.
However, the move is completely justified. I sat and tried to find negatives within the earnings report and conference call, yet I couldn’t establish any significant problems with the quarter nor guidance. Wall Street felt the same, and a number of powerhouse investment banks upgraded the stock with higher price targets, including Goldman Sachs Group, Inc. (NYSE:GS), which raised its price target to $84 per share.
So you may worry about getting into the stock today. I would be with any company which has moved so far so fast. However, I would like to make the case as to why shares may not be done just yet. In this article I would like to review the company’s recent performance and growth potential going forward.
Starbucks Corporation (NASDAQ:SBUX)’ global comparable-store sales rose by 8% in the third quarter as a result of a number of tailwinds, including higher traffic and per-ticket revenue. On a segment-by-segment basis, there is strength within all areas of business. The company was able to grow by 9% in both the Americas and China/Asia Pacific segments. This growth was due in large part to a 7% increase in traffic through the company’s impressive number of locations.
Revenue in the quarter increased by a full 13% over last year to a record $3.7 billion. Rising revenue in combination with 150 basis-point improvement in operating margins allowed the company to generate record earnings per share. Third quarter EPS of $0.55 per share, a 28% increase over last years’ third quarter, represents the second-highest quarterly earnings per share in Starbucks Corporation (NASDAQ:SBUX)’ 42 year history.
The key to much of Starbucks Corporation (NASDAQ:SBUX)’ success over the last few years has been the full roll-out of its rewards program. By pushing consumers into its rewards program, the company realizes some major benefits. First, the company saves itself from costly transaction fees on every sale. Second, loyalty; consumers are carrying around a gold card with their name printed on it. What more could a coffee drinker want as a status symbol?
In the quarter, the company saw 3% year-over-year growth in total dollars loaded on Starbucks Corporation (NASDAQ:SBUX)’ cards in retail North America and nearly 100% year-over-year growth in dollars loaded on cards via Starbucks’ mobile apps and web properties. Going forward, the focus on the rewards will help margins and revenue.
Moreover, the move to diversify its business across a number of segments will help stabilize the high growth rates. Starbucks Corporation (NASDAQ:SBUX) announced it would be partnering with Danone SA (ADR) (OTCMKTS:DANOY), the leader in everything yogurt through its Dannon brand. The partnership will combine the recently acquired Evolution Fresh brand and the dairy expertise from Dannon.
Dannon stands in a great position within the United States with 30% market share, however, its product demand falls short comparison to European markets. In the United States, we are seeing a shift toward Greek yogurt. The deal could offer Dannone the ability to increase its market share as demand rises to European levels. The first product the company will be launching is a ready-to-eat Yogurt parfait to replace Starbucks Corporation (NASDAQ:SBUX)’ current Greek offerings.
Dannon-branded ready-to-eat Greek yogurt and Evolution Fresh-branded CPG products co-created by Starbucks and Dannon will start rolling out at Starbucks Corporation (NASDAQ:SBUX) stores in North America in the spring of 2014. They will reach grocery channels in 2015 and reach global distribution over time. I would expect the partnership to be accretive to revenue and brand recognition for both companies in the years ahead.