Will Starbucks Corporation (SBUX) Continue to Heat Up?

Page 1 of 2

The ongoing rally of shares of Starbucks Corporation (NASDAQ:SBUX) hasn’t slowed down, and its latest earnings report kept investors happy. Will this company’s stock keep rising? Is the company facing perils that could curb its growth?

Revenue keeps growing

In the third quarter of fiscal 2013, revenue of Starbucks Corporation (NASDAQ:SBUX) rose more than 13% (year-over-year). In comparison, other leading brands, such as Dunkin Brands Group Inc (NASDAQ:DNKN), haven’t shown such a sharp rise in revenue. Dunkin’ Brands’ net sales increased only 5.9%. For Starbucks, most of the growth in revenue was in China/Pacific region. The company’s net revenue jumped 29% during the quarter. This region’s revenue accounts for only 6% of Starbucks’ total revenue.

But, at the current pace, the China/Pacific region should account for roughly 10% of its revenue by the end of the year. Nonetheless, the latest developments in China might lead to an economic slowdown in this country, which may curb down the high growth rate of Starbucks Corporation (NASDAQ:SBUX) in China. Furthermore, the high volatility in the currencies markets could also slash some of its revenue.

Starbucks Corporation (NASDAQ:SBUX)Most of the growth of Dunkin Brands Group Inc (NASDAQ:DNKN)’ revenue was related to its Baskin-Robbins International segment that grew 16% (year-over-year). But this jump in revenue was partly attributed to the company’s change in its Bertico litigation reserve from last year, and the income from selling 80% of its Baskin-Robbins Australia business. Therefore, the company’s revenue, after excluding these one time events, didn’t increase much.

Profit margins

Even though Starbucks augmented its revenue, the company’s profit margin expanded. Its profitability rose to 16.4% in the third quarter of fiscal year 2013. Most of the growth in profit margin was due to the rise in its profitability in China/Asia Pacific and Americas segments. The EMEA segment continues to have very low profit margin of only 3.2%. The sharp rise in Starbucks Corporation (NASDAQ:SBUX)’ China/Asia Pacific segment is likely to further augment its profit margin. On the other hand, the slow growth in the EMEA segment might benefit the company as it will lower its exposure to these regions that have very low profitability.

Starbucks Corporation (NASDAQ:SBUX) wasn’t the only company in this industry that experienced a rise in profitability: Dunkin’ Brands also pulled up its profit margin to 42.1% — an increase of more than 15.3 percentage points. But this jump in profitability is a bit misleading, and is mostly related to the company’s recognized profits from selling its Baskin-Robbins Australia business. The company’s gross profitability remained nearly unchanged at around 80%. This suggests Dunkin Brands Group Inc (NASDAQ:DNKN) profitability hasn’t increased due to its core operations.

Starbucks keeps expanding its brand

The company doesn’t only expand its reach to other countries such as China, it also expanding its brand with its collaborations with other leading companies such as Teavana Holdings. Starbucks Corporation (NASDAQ:SBUX) purchased Teavana at the end of 2012, which makes Teavana a full subsidiary of Starbucks. It paid $620 million for the company. This acquisition helped Starbucks expand its brand beyond coffee and target the tea market as well. Starbucks’ CFO, in an interview, also expressed his confidence in incorporating the Teavana brand into Starbucks.

The company also expanded its agreement with Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) vis-à-vis the manufacturing, marketing, distribution, and sale of Starbucks Corporation (NASDAQ:SBUX) and K-Cups worldwide. This partnership, which started back in March 2011, has benefited both companies in expanding each other’s brand and revenues. Starbucks has successfully sold more than 850 million Starbucks coffee K-Cup packs in two years. This partnership has helped pull up Green Mountain’s stock that has soared by approximately 84% (year-to-date).

The company’s revenue also rose 13.5% in the first quarter of 2013 (year-over-year) and its profitability increased by 4.2 percentage points to 21.1%. So, both companies have benefited from this partnership. By expanding this deal, both companies are likely to augment not only their revenue, but also their profit margins.

Page 1 of 2