On Thursday, Starbucks Corporation (NASDAQ:SBUX) announced its quarterly earnings, which made it clear once again that the company’s growth story is far from over. As the sales of the company increased sharply and costs related to coffee purchases fell at the same time, the company’s margins expanded more than what the analysts were looking for.
Not only the results for the last quarter were good, but the company also increased its guidance for the next quarter and the full year, which fueled a rally in the after-hours of Thursday.
Starbucks Corporation (NASDAQ:SBUX) reported a profit increase of 25% as the company’s same-store sales rose by 8% globally and 9% in the US. During the last quarter, the company raised some of its prices slightly (small enough to not take the notice of customers but big enough to contribute to the company’s margins). It’s also been experimenting with different types of snacks in different markets to address country-specific tastes.
The financials of the last quarter
The $417.8 million or $0.55 per-share earned by the company in the last quarter was above the $0.53 that was expected by the analysts and the $0.43 that was earned in the same quarter last year. The analysts were looking for a revenue figure of $3.7 billion, which the company topped slightly. For the full year, Starbucks Corporation (NASDAQ:SBUX) expects to earn between $2.22 and $2.23 in EPS (a pretty narrow range) as opposed to its earlier EPS guidance of $2.12 to $2.18. Last year, Starbucks Corporation (NASDAQ:SBUX) generated $1.97 in net earnings which gives us a trailing P/E ratio of 34 and a forward P/E ratio of 31.
This was the highest performing third quarter in the history of Starbucks Corporation (NASDAQ:SBUX). The company is going through a transition where it moves from being a coffee house to becoming one of the symbols of American lifestyle. The company’s stores present its customers with unique experiences where they can spend hours, surf the Internet, study for their exams, eat snacks, hang out with their friends and of course drink coffee. The company increased the variety of packaged foods and it will soon add yogurt to its portfolio.
Starbucks Corporation (NASDAQ:SBUX) isn’t all about coffee shops either. The company produces a large number of coffee products that are being sold in grocery stores. For example, one of the company’s most popular product lines involves K-cups for Keurig machines.
Competitive environment
Starbucks competes with millions of local coffee shops in addition to McDonald’s Corporation (NYSE:MCD) and Dunkin Brands Group Inc (NASDAQ:DNKN). While McDonald’s Corporation (NYSE:MCD) operates more than 30,000 restaurants, most of which now serve coffee, Dunkin Brands Group Inc (NASDAQ:DNKN)’ has about 10,000 restaurants serving coffee (the company was somewhat criticized for copy-catting Starbucks in store designs.)
In comparison, Starbucks has about 18,000 locations. McDonald’s Corporation (NYSE:MCD) and Dunkin Brands Group Inc (NASDAQ:DNKN)’ can’t really set their pricing the way Starbucks does. Starbucks is known to be a premium location and it can command much higher prices for its products than most other stores can. This gives the company a huge advantage in setting its margins.
If McDonald’s or Dunkin’ were to increase their prices, they would lose customers, but when Starbucks increases its prices, the customers stay loyal to it. In some countries (for example the countries in Southeastern Asia), spending a day in Starbucks is considered a behavior of high-status.
Speaking of McDonald’s
McDonald’s is seeing a slowdown in its business. The company’s same-store sales aren’t expected to grow more than 2% to 3% in the next few years as the market for cheap fast food gets saturated. Also, the company currently “enjoys” a bad image such that going to McDonald’s for a meal is seen as a shameful activity as if one is doing drugs or something. Many people see the food in McDonald’s as the main culprit of the obesity problem in the US and the company tries to counteract this problem by adding healthier items to its menu.
A few days ago, McDonald’s announced its quarterly results and performance was less than impressive. Currently, McDonald’s is a good stock for those looking for a decent dividend yield coupled with stability, but those that are looking for aggressive growth can find better value in Starbucks.
Speaking of Dunkin’ Donuts
This company also announced its earnings in recent days. The company generated $0.41 (up 15.5% compared to the same quarter last year) in net earnings and $182.5 million in revenue. The company’s net earnings passed the analysts’ estimates slightly while the revenue fell a little behind. The company enjoys very healthy margins as its operating income margin was as high as 50% in the last quarter. The company’s same-store growth was 4%, which is above McDonald’s but below Starbucks.
Dunkin’ will continue to grow at a double-digit rate for the foreseeable future because of the new store openings. I prefer Starbucks over Dunkin’ because Starbucks is a fairly large company, which means you can get some growth with some stability when you invest in it. Dunkin’ is a smaller company and it doesn’t offer as much stability.
Conclusion
The growth story continues on for Starbucks as it has strong margins, healthy demand and it seems to have the coffee costs under control. Currently McDonald’s enjoys the lowest P/E ratio among the three companies but it also has the lowest growth rate. The company’s current P/E ratio is 18. In comparison, Starbucks enjoys a P/E ratio in the mid-30s and Dunkin’ enjoys a P/E ratio in mid-40s. Conservative investors should invest in McDonald’s, aggressive investors should pick Dunkin’ and those looking for a fine balance between strong growth and stability will find a lot of value in Starbucks.
The article Starbucks: The Growth Story Continues originally appeared on Fool.com and is written by Jacob Steinberg.
Jacob Steinberg has no position in any stocks mentioned. The Motley Fool recommends McDonald’s and Starbucks. The Motley Fool owns shares of McDonald’s and Starbucks. Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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