Shares of Starbucks Corporation (SBUX - Analyst Report) fell almost 5% in after-market trading after the coffee giant reported disappointing fourth quarter fiscal 2014 sales results and gave a weaker-than-expected outlook for the next quarter.

Earnings Discussion

Adjusted earnings of 74 cents per share in fourth-quarter fiscal 2014 were in line with the Zacks Consensus Estimate as well as management’s expected range of 73–75 cents.

Earnings grew 23% year over year driven by aggressive operating margin expansion which made up for a relatively softer top-line performance.

Adjusted earnings exclude loss/benefit from the sale of retail operations in Australia and Malaysia in the fourth quarter and transaction costs incurred in the quarter related to the planned acquisition of the remaining 60.5% share of its Japanese join venture (JV).

In September, Starbucksannounced its plans to take full ownership of its Japanese JV — Starbucks Coffee Japan, Ltd. — in a deal valued at around $914 million.

Starbucks Corporation - Earnings Surprise | FindTheBest

Revenues and Comps Slow Down

Total fourth-quarter sales of $4.18 billion increased 10% year over year but missed the Zacks Consensus Estimate of $4.24 billion by 1.4%.

Same-store sales (comps) grew 5% in the quarter, slowing slightly from 6% in the previous quarter. The comps rise comprised 1% increase in global traffic and 4% average ticket growth.

Improved performance in Europe and continued strong momentum in the Channel Development segment was offset by slower comps in the Americas and China-Asia-Pacificsegments.

Margins Remain Strong

Adjusted operating margin increased 280 basis points (bps) to 20.5% driven by strong sales leverage, improved inventory management, better operating efficiency and cost savings. Margins expanded in all the operating segments, except China-Asia-Pacific.

Segment Details

Americas: Net revenue in this flagship segment rose 9% over the prior-year quarter to $3.04 billion, attributable to 5% growth in comps and store openings.

Expanded food offerings — breakfast sandwiches, new lunch sandwiches and premium priced La Boulange bakery items — and new tea beverages — Teavana Oprah Chai and Teavana Shaken Iced Tea boosted comps. Food once again contributed 2 points to comps growth in the quarter driven by an expanded breakfast selling program. Drive-through stores have also been an important contributor to the top line.

However, comps slowed down from a 6% increase seen in the last quarter due to a difficult retail environment which slightly hurt traffic growth in the quarter.

Europe, Middle East and Africa (EMEA): Net revenue increased 10% year over year to $321.8 million in the quarter driven by currency tailwinds, improved comps and better in-store execution. Comps grew 5% in the quarter, improving from the 3% increase seen in the last quarter. Starbucks continues to outperform in the U.K. and Germany.

China-Asia-Pacific (CAP): Net revenue grew 21% to $309.9 million in the quarter driven by the rapid pace of store openings. Though comps grew 5% in the quarter, it slowed down from the 7% rise in the last quarter due to 1% decline in average ticket. Lower sales of seasonal packaged food offerings in China hurt ticket growth in the quarter. Store traffic trends remained strong in the quarter.

Channel Development/CPG: This segment includes whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages, Starbucks VIA Ready Brew, and Starbucks and Tazo branded K-Cup packs sold through channels such as grocery, specialty retailers, foodservice etc.

Net revenue grew 12% year over year to $399.1 million in the quarter driven primarily by increased sales of Starbucks/Tazo branded K-Cup portion packs which grew 26% in the quarter.

All-Other: The All-Other segment comprises emerging brands including Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution Fresh and Digital Ventures.Revenues in the segment grew 3% to $108.9 million.

Annual Results

In fiscal 2014, total revenue increased 11% to $14.45 billion, missing the Zacks Consensus Estimate of $16.50 billion. The top-line growth was in line with management’s expectations of 10% or higher growth. Comps increased 6%, in line with management’s expectation of its growing in the mid single-digit range.

Adjusted earnings of $2.66 per share missed the Zacks Consensus Estimate of $2.67 but were within management’s expected range of $2.65–$2.67. Earnings increased 21% from the prior year.

Adjusted operating margin expanded 210 bps year over year to 18.6% in fiscal 2014, better than management’s expectation of its expanding approximately 200 bps.

Dividend Increased

The board of directors of the company announced a 23% dividend increase to 32 cents per share which amounts to an annual dividend of $1.28 per share.

Fiscal 2015 Outlook

Starbucks expects revenues to grow 16–18% in fiscal 2015, including approximately 6–7% of revenue growth from the Starbucks Japan acquisition. Previously, excluding Starbucks Japan, management expected revenues to grow 10% or higher. Starbucks Japan is expected to add $1 billion to the revenues in fiscal 2014.

Comps are still expected to grow in the mid single-digit range. The company expects to open 1,650 stores in the year — 650 in the Americas, 150 in EMEA and 850 in CAP. Previously, management expected to open 1,600 stores.

The fiscal 2015 adjusted earnings (excluding adjustments related to Starbucks Japan) are expected in the range of $3.08 to $3.13 per share. This forecast represents 16–18% increase over the fiscal 2014 levels, lying in the middle of the long-term range of 15–20%. The company previously forecasted earnings growth at the lower-end of the long-term range.

On a positive note, management talked about improved visibility on the impact of rising commodity costs on fiscal 2014 earnings. Starbucks sees no coffee shortage despite Brazil’s drought and coffee prices remaining at record highs. Despite the sharp rise in coffee prices this year, management expects commodity costs to have a roughly neutral impact on fiscal 2015 earnings as around 75% of its coffee needs for the year is locked at favorable prices.

First-Quarter Outlook Soft

Adjusted earnings per share are expected in the range of 79 to 81 cents in the first quarter of fiscal 2015, representing 14–17% growth. The first-quarter earnings expectations fell short of the Zacks Consensus Estimate of 83 cents.

The first-quarter earnings growth rate is lower than the full-year target due to higher marketing investments planned for the upcoming holiday season and costs related to the October leadership conference.

Other Stocks to Consider

Starbucks carries a Zacks Rank #2 (Buy). Better-ranked restaurateurs worth considering include Ruby Tuesday, Inc. (RT - Snapshot Report),Jamba, Inc.(JMBA -Snapshot Report) and Jack in the Box Inc. (JACK - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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