The Street had high expectations for Starbucks Corporation (NASDAQ:SBUX) going into its third-quarter earnings release… and it delivered.
With the stock up about 6%, a quick glance at the quarter’s key metrics in comparison to last quarter reveals why the market is reacting so positively.
|Quarter||Revenue Growth (YOY)||Comparable Store Sales (Global)||Operating Margin|
The company’s growth rates actually accelerated. Meanwhile, its operating margin continues to expand.
As if the quarter’s performance wasn’t enough to get the Street excited, Starbucks Corporation (NASDAQ:SBUX) introduced robust guidance for 2014.
|Revenue growth||10% to 13%|
|Net new stores||1,400|
|Consolidated operating margin improvement||150 to 200 basis points|
|EPS growth||18% to 22%|
The “flywheel” effect
Starbucks Corporation (NASDAQ:SBUX) undoubtedly had a great quarter, but is the company really deserving of a price-to-earnings ratio of 35? Certainly not on the foundation of a great quarter and robust guidance alone.
To merit such a premium, a company should possess both a durable competitive advantage and meaningful momentum. Given these characteristics, projecting sustained high levels of EPS growth for years to come is a realistic assumption, giving credence to Starbucks Corporation (NASDAQ:SBUX)’ price-to-earnings ratio.
Its gross profit margin of 56% is solid evidence of the company’s brand-enabled pricing power, supporting the argument for Starbucks’ durable competitive advantage. Fifty-six percent is just 4 percentage points short of Buffett’s beloved The Coca-Cola Company (NYSE:KO) stock, a classic example of a consumer goods business with a Buffett-like economic moat.
Its operating scale further reinforces the company’s economic moat. As Starbucks Corporation (NASDAQ:SBUX) continues to open new stores and expand its distribution, the company is benefiting from the scale that accompanies volume. Though refranchising in Europe and easing coffee costs can be credited for much of Starbucks’ operating margin improvements, some of it is simply the result of a leverageable business. Going forward, management’s guidance for 150 to 200 basis points’ improvement in operating margin is also reflective of Starbucks’ clear scale advantages.
An economic moat alone, however, won’t deliver the company from its lofty expectations. Starbucks needs momentum. Though management’s plan for 1,400 new stores in 2014 will definitely help, it’s Starbucks Corporation (NASDAQ:SBUX)’ ability to diversify its offerings and expand its distribution that is really propelling the company.