Starbucks 1Q numbers - light on growth

Starbucks is another business that reported numbers after the bell yesterday. The headline says it all - Starbucks Reports Record Holiday and Record Q1 FY17 Results. Revenues rose 7 percent to 5.7 billion Dollars, a strong showing in both China and decent enough in the home market. What is also being highlighted is the number of US rewards memberships, which rose 16 percent to 12.9 million folks. Earnings per share grew 11 percent to 51 cents, margins increased by ten basis points, which is always good to see as a shareholder, moving in that direction. The company has a fairly generous dividend policy, 25 cents a share is the current quarterly dividend payment, up from 20 cents previously.

251 stores were opened during the 13 week period in North America alone (currently 5415 stores in total), 303 more in China! Across the rest of the globe it was 95. The expectations across the group are for 2100 new stores to be opened. On a longer dated look, the company expects that by 2021 another 12 thousand net additions, by that time the network would top 37 thousand stores. Currently it is 25,734 as at January 1. That is pretty sizeable, the group are up to over 1000 stores in South Korea (I am guessing 0 in North Korea), over 2500 stores in China (in 118 cities) and now 1245 stores in Japan.

The business in China will be their largest business in the coming decade or so. What is quite amazing is that there are fewer stores in the traditional coffee drinking countries than you may think, 58 in France (the whole country), 161 in Germany, 101 in Spain and of course, zero in Italy, for now. I don't feel so bad for the 3 that we have here, Taste Holdings are doing a good job!

Not only are the company a coffee experience destination, by adding rewards members via their excellent technology platforms, they lock you into the daily routine, they aim to continue to stay abreast with the changing patterns of consumption. Having partnered with WeChat (TenCent owned platform) in China, more Chinese customers can gift each other, or pay, using their existing infrastructure. This is key to finding the right partners and speeding up the payment process, which means getting your coffee quicker. Productivity gains through technology enhancements.

The flagship roastery in Seattle (Paul visited it recently and sent us some pictures) looks absolutely beautiful, a true destination of sorts, see the pictures - Roastery & Tasting room. Coffee truly is a global drink, one that is multicultural, whether you are loading up on an espresso in Italy or drinking condensed milk infused coffee in Vietnam, the social interactions and friendship building (or you quick caffeine fix) at a place that feels homely, is important.

The product is quality and really appeals to the up and coming (and established) middle classes across the globe. In a way it is the same experience whether you are aboard aircraft carrier USS Harry S. Truman (staffed by sailors), or in the Louvre (missed that one) or at the Tower of London, your fix is almost always around the corner. Aircon and Wi-Fi too, right? Their in-home reserve business (bring your beans back home) will no doubt grow over time too, with more "home" solutions. A consistent in-store experience is key to customer retention, as are the prime locations. And of course the rewards program, which is real.

It is always worth noting that Howard Schultz, the current CEO and founder steps into an executive chair position, Kevin Johnson steps into the CEO role; you will recall that we wrote about it in December - Schultz shuffles over, COO holds the coffee cup now. The company announced two days ago that they have strengthened their non-executive management team, the executive chairman of the LEGO brand group, Jorgen Vig Knudstorp joins, as does President and Chief Executive Officer of Sam's Club Rosalind Brewer (name made for the job) and Satya Nadella, the CEO of Microsoft. Wow. That is a pretty strong team. Technology, logistics and distribution and global brands, all there, dare I say it .... Like a boss.

The company is still around 110 million shares away from completing their buyback program, having acquired 7.6 million shares in the last quarter. There are 1.46 billion shares in issue, that is a buyback of 7.5 percent of all the shares in issue. Over time, of course to a certain extent that is diluted by stock based compensation. Starbucks is a great brand, the guidance may have disappointed to the downside, hence the stock has sold off nearly 4 percent after-hours. We continue to favour (in this space) what we think is an exceptional brand with superb products that consumers are desperate for. The stock trades on a pretty demanding multiple, 27 times forward and we are confident that they can meet the lofty expectations of the investor community. We definitely accumulate on weakness. If congestion is a big problem (as reported), solving it with technology is a huge win in the future.