In search of the perfect cup of Joe

Last night we received fourth quarter and full year results from Starbucks. Lets analyse the full year numbers. Revenues increased 11% for the year to end at $16.4bn. Global comparable sales increased 6%. This equated to operating income of $3.1bn and an operating margin of 18.7%. Earnings per share came in at $2.71. The company opened 1599 store in the year.


Sounds like a good set of figures. Geographically the company is still very reliant on the Americas with 73% of sales. But they have strong aspirations to grow elsewhere which includes buying the remaining 60.5% stake in Starbucks Japan for nearly $1bn.


CEO Howard Schultz is certainly not standing still. They are leaders in mobile payments, processing nearly 7 million transactions a week through the Starbucks application. On top of that Starbucks want to implement both food and a delivery option through the app. Imagine being able to order your lunch and coffee via a couple of swipes on your phone only to arrive at your desk 15 minutes later.


Another innovation targets coffee connoisseurs. Starbucks are selling upscale bags of coffee in super markets which are segmented by origin. Apparently this is a big thing amongst the coffee experts, much like wine. Included in this genre are plans to open 100 speciality stores selling high end coffee. The hipsters will lap this up!


The share price has been under strain. Year to date the share price is down a few percent against the S&P which is up 8%. Brazil, the largest coffee producer in the world has experienced bad weather and coffee prices have nearly doubled since the end of 2013. Starbucks have had to push some of this onto the consumer. This is not a train smash though. Firstly Starbucks is a premium product and their clientele are willing to pay up. Secondly according to this WSJ article titled Starbucks's Cup is Half Full, Raw material prices only make up 15% of the price of a cup of coffee. Great margin business.

The stock looks like it will open at around $74.72, down 3.5% after these numbers came out. Guidance for next year was slightly less than expected, Earnings of $3.42-$3.52 for 2015 is what management thinks they will make. That includes the acquisition of the Japanese business. On a forward basis the stock trades at 21 times next years earnings. It's not cheap but this is a business growing fast.


We think this period of weakness creates a good buying opportunity. Coffee is an exciting business. A socially acceptable stimulant that according to recent studies is actually good for you. Most importantly the Starbucks experience is great. I wish they would come to South Africa in full force. I suspect it will come soon. Buy.