New Products Will Boost Starbucks Profits: Analyst

Ahead of Starbucks’ fiscal second-quarter earnings announcement, the question on investors’ minds remains: Will its push to diversify translate into profits?

Starbucks Coffee
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Starbucks Coffee

Keith Siegner, restaurant analyst for Credit Suisse, believes so. “It absolutely can,” he said. “What makes this high-quality growth name so unique is the constant inflow of completely new verticals.”

Starbucks has been busy extending its reach in the past several months, announcing plans to sell single-serve coffee machines, introducing a line of energy drinks called Starbucks Refreshers, and launching Evolution Fresh juice bar in Washington, its first foray into the $1.6 billion premium juice category. Some outlets in Seattle also have started offering beer and wine.

“What we constantly ask investors is, ‘If you’re going to sell this, what are you going to replace it with? What else gets you 20 to 25 percent (earnings per share) growth with very light (capital expenditures) requirements? It’s hard to replace,” Siegner said.

By “light capital expenditure requirements,” Siegner is referring to the coffee chain’s partnership with Germany-based Krueger, which will manufacture its single-serve machines and cups. “All [they] really need to do is source and roast and distribute the coffee.”

On average, analysts are looking for earnings of 39 cents per share, an increase of about 15 percent from the year-earlier period, on revenue of $3.18 billion, according to Thomson Reuters. Same-store sales estimates for the Americas hover around 8.1 percent, while China and the EMEA regions are expected to register 18 percent and 2 percent, respectively.

Siegner also pointed out that the company is already enjoying tailwinds from lower commodity prices. Industry watchers are predicting coffee prices to continue their decline, from $2.94 a pound in 2012 to $1.79 a pound by 2015, the analyst said. This is expected to add around 47 cents to Starbucks’ earnings per share over the next three years.

Will the company’s packaged-goods business eventually rival its café business?

“[The new products] are not about the retail store opportunity,” Siegner said. “It’s another way to make more money by leveraging their brand into capital-light growth verticals.”

He is also optimistic about the coffee giant’s ambitions in China, increasing the number of stores from 500 today to an expected 1,500 stores by 2015: “At least for the foreseeable investment horizon, these are very doable numbers.”

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Disclosure information was not available for Keith Siegner nor his firm.