Starbucks 2Q numbers - good growth in China

Last Thursday night we received second quarter results from Starbucks. But before we delve into the numbers let us look at some of the hype created here in South Africa after the first Starbucks was opened in Rosebank. Check out the SAStarbucks twitter account for some pictures of the opening. Apparently there were queues until the early hours of the morning and there still are. The brand strength is incredible and the drive for quality coffee, especially in developing markets is growing like China (that analogy should be used more often, no, China is not finished, as you will no doubt see in the numbers below).

Back to the global business, revenues grew by 9% to a second quarter record of $5bn. Operating margins were also at a record 17.3%. Operating income grew 11% to $864 million which equated to an 18% increase in Earnings per Share to $0.39. This company is still dominated by the Americas, 69% in this quarter to be exact. And that is where a lot of the excitement lies. Firstly, the US business is very healthy, growing revenues by 10% in that region. Secondly, the opportunity to expand around the globe with their fabulous brand is huge. As we can see here locally.

Stores are popping up all over the place. They opened 350 in the quarter (that is nearly 4 a day!) to a grand total of 23921. Shem, that makes the big deal in Rosebank feel a little small. It's big however to the Taste holdings team and coffee enthusiasts (hipsters) in the Northern Suburbs of Johannesburg. It's all relative.

China is a big story for Starbucks. Revenues grew 14% in the region. They have opened 884 new stores in the past 12 months in China and Asia Pacific. This inherently tea drinking region is loving the coffee craze. Starbucks is the Nike/Apple of coffee and the allure created around the brand is massive.

The company also sits at the forefront of payments innovation through the Starbucks App. A whopping 8 million Mobile Order and Pay transactions are processed per month. There are now 12 million active loyalty subscribers in the US which is growing 16% year on year. People love to get free things, even if they have to buy 10 coffees to get 1 free. Using your phone is easy and keeps you coming back. I am sure this will be implemented throughout their global operations.

As expected, you have to pay up for all this good news. The stock trades on 27 times next years earnings. But they are expected to grow earnings by 16%. The story is certainly compelling and we feel that they will consistently grow and justify this multiple as they push stores throughout the globe. At this stage 90% of revenues comes from company operated stores. The other 10% is from licensed stores or franchisees. Using guys like Taste who will take the capital risk to push stores in smaller regions will help them with this cause. And I am sure Starbucks are able to negotiate favourable terms for themselves. We reiterate our buy rating on this stock.