Neutral on Starbucks - Analyst Blog

We currently reiterate our Neutral recommendation on Starbucks Corporation (SBUX).

Seattle, Washington-based Starbucks registered robust results for the fourth quarter and full year 2010. Adjusted quarterly earnings of $0.37 a share was ahead of the Zacks Consensus Estimate of $0.32 and increased 54.2% from $0.24 delivered in the prior-year quarter.

For the full year 2010, adjusted earnings were $1.28 a share, reflecting a 60% increase versus $0.80 earned in fiscal 2009. Further total sales for the fourth quarter jumped 17.2% to $2.8 billion, while full-year revenues increased 9.5% to $10.7 billion.

Starbucks has a significant presence in the international market. The company's international division sells coffee and other beverages, complementary food, whole bean coffees, and coffee brewing equipment and merchandise through company-operated retail stores in Canada, the UK and several other markets.

Furthermore, specialty operations are mainly inclusive of retail store licensing operations in several other countries and foodservice accounts. The total net revenue at the international segment climbed approximately 21% year-over-year to $619million in the most recent quarter. The significant international presence has boosted its growth and we believe will continue doing the same in the coming years.

Moreover, unlike other coffee retailers, Starbucks offers wide range of products. In addition to its retail operations, the company produces and sells bottled Frappuccino coffee drinks, Starbucks DoubleShot coffee drink, and a line of super premium ice creams. Starbucks' brand portfolio offers a wide variety of consumer products. Tazo Tea's line of innovative super premium teas and Hear Music's exceptional compact discs enhance the company's value through best-of-class products.

The leading retailer of specialty coffee in the world is able to broaden its customer base by offering a variety of coffee flavors. We believe that its broad product portfolio and consumer base will drive growth in the coming quarters.

However, intense competition from other established players and significant international operations which are severely impacted by negative currency translations are major concerns for the company. In addition, the operations at Starbucks depend greatly on information technology.

The company's ability to manage and coordinate its business effectively relies on the efficacy of the systems. The dependence on information technology to operate its business has inherent risks. Technological failure or obsolescence has the potential to adversely affect the company's results.

The company recently announced its intention to end its 12-year old contract with Kraft Foods Inc. (KFT) on the basis that the latter did not actively protect and promote the Starbucks Coffee and Seattle's Best Coffee brands

The company primarily competes with Yum! Brands Inc. (YUM), McDonalds Corp. (MCD) and Darden Restaurant (DRI) and currently has a Zacks #3 Rank, which translates into a short-term Hold rating.

 
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