(By Mani) Starbucks Corp. (NASDAQ:SBUX) offers compelling risk/reward despite lackluster third-quarter results, as investors consider the coffee bean seller's long-term growth potential.
The fiscal 2012 is a year of cost absorption and heavy reinvestment period for Starbucks. The company plans to open about 1,200 net new stores globally in fiscal 2013, including about 600 net new stores in the Americas. Of the about 600 net new store openings in the Americas, majority will be in the U.S., while more than half of those about 500 net new store openings in China/Asia Pacific will be in China.
Starbucks remains one of the few large cap companies with 10 percent plus revenue growth and secular margin tailwinds. The company operates more than 6,705 company-operated stores and 4,082 licensed stores in the United States. Its brand portfolio includes the Starbucks, Tazo tea, Seattle s Best Coffee, and Starbucks VIA Ready Brew.
While fiscal 2012's high-teens EPS growth may disappoint some investors, there are several drivers for 20 percent growth, including favorable coffee costs, EMEA margin recovery, high margin unit growth in Asia, and the ongoing same store sales and consumer products growth in the US.
"We continue to see potential for 20%+ EPS growth over the next 2+ years, even as the company reinvests in new product offerings and channels," UBS analyst David Palmer wrote in a note to clients.
However, the market underestimates the long-term potential of Starbucks as the company is expected to deliver solid, free cash flow and zero balance sheet net debt.
Starbucks, the world's largest specialty coffee retailer, is expected to benefit from declining coffee costs, giving the company the ability to lock in lower prices for fiscal 2013.
Recently, Starbucks and Green Mountain Coffee Roasters, Inc. (NASDAQ:GMCR) have agreed to use Starbucks-branded Vue packs for use in the Keurig Vue Brewer. The K-cup sales growth has been stronger than expected, and fiscal 2013 is shaping up to be an exciting year for single-serve growth in Starbucks' own US retail store network. Palmer sees that K-cups alone to provide 10 - 15 cents per share lift to EPS in fiscal 2013 with the larger lift due to higher penny profit.
For the third quarter ended July 1, 2012, Starbucks earned $333.1 million or 43 cents a share, higher than $279.1 million or 36 cents a share for the year-ago quarter. The earnings came in below the company guidance of 45 to 46 cents a share and consensus estimate of 45 cents a share.
Total net revenues for the third quarter rose 12.7 percent to $3.30 billion, missing analysts' view of $3.33 billion. Same-store sales grew 6 percent, driven by a 5 percent increase in traffic and a 2 percent rise in average ticket.
However, Starbucks cut its fourth quarter earnings outlook to 44 to 45 cents a share from 46 to 48 cents a share to reflect the difficult economic environment. Analysts currently expect the company to earn 45 cents a share for the fourth quarter.
For its fiscal year 2013, Starbucks forecast revenue growth of 10 to 13 percent and earnings of $2.04 to $2.14 a share. Analysts currently expect earnings of $2.16 per share and revenue growth of 12.3 percent.
Though it can be difficult to fight downward momentum, the stock is expected to find valuation support as investors recognize Starbucks for its long-term growth potential.
"At current after market prices, we see a compelling risk/reward scenario, but suspect that we will only be able to make a strong reiteration after seeing steady mid-single digit SSS growth in the coming months," Palmer said.