Starbucks Brews Positive Earnings While Dunkin' Brands Melts

Zacks

Starbucks (SBUX) reported earnings after the bell today.  Earnings came in ahead of the Zacks Consensus Earnings Estimate of $0.66 per share by posting Q3 earnings of $0.67 per share.  Revenues came in above the Zacks Consensus Revenue Estimate of $4.158 billion, by posting revenues of $4.2 billion. 

Strong performances by Teavana teas, the continued rollout of La Boulange pastries and sandwiches, and the introduction of carbonated drinks helped increase SSS by 5.1%, beating the consensus estimate of 5%.  Further, China saw SSS grow by 7%, and overall operating margins grew 18.5%.  These positives caused management to raise full year EPS estimate from $2.65-$2.67 to $2.70-$2.72.

There had been concern that coffee bean prices would impact the top line due to fears around Brazil’s coffee crop this year.  But recent rains have help to alleviate those concerns.  Moreover, management has had the foresight to hedge their coffee prices by locking in (below FY14 levels) a large percentage of their FY 15 coffee needs.  This should create a strong tailwind into and through 2015, and or protect against any unforeseen issue with crops.  Further, it gives the company pricing power over their rivals. 

In May of 2013, Starbucks began their assault on their competition by discounting bags of coffee that are sold in grocery stores by $1.00 for eponymous beans and its more common brand Seattle’s Best.  This plan enabled the company to take a larger share of the market.   The discount was a direct attack upon the low end of the coffee market. 

According to Rita McGrath, professor at the Columbia Business School, “Cutting prices on its bags of coffee also takes a swing at the competition’s knees.  By committing to lower prices (and not using coupons or sales), Starbucks is sending a signal.  It’s serious about the low end of the market; Dunkin’ Donuts, Folgers, and other competitors can either trim their margins further, or give up volume.  Either way they lose.” 

Dunkin’ Brands (DNKN) reported earnings before the bell this morning, and the Starbucks impact is very evident.  Dunkin’ Brands met the Zacks Consensus Earnings Estimate of $0.47, but missed the Zacks Consensus Revenue Estimate by $7.6 million. 

The revenue miss was due to several factors; SSS growth did not meet expectations (U.S. Dunkin’ Donuts +1.8%, U.S. Baskin-Robbins +4.2%), SSS declines Internationally (Dunkin’ Donuts -3.1%, Baskin-Robbins -1.6%).  This caused management to lower its earnings and sales targets for the year.  According to Chief Executive Nigel Travis, “Second quarter sales growth was below our expectations, with Dunkin’ Donuts U.S. comparable store sales not accelerating as fast or to the degree that we anticipated after a difficult first quarter.”

Therefore, management reduced full year adjusted EPS from $1.79-$1.83 a share to $1.73-$1.77.  Further, the company trimmed revenue growth expectations from 6%-8% to 5%-7%.  And finally management reduced U.S. SSS expectations from 3%-4% to 2%-3%. 

In afterhours trading, SBUX is down less than 1% on mild volume, and DNKN saw a price decline after the earnings announcement, but was able to recapture some of those losses throughout the day, and ended the day down 4.6% from the previous day’s close. 

Tomorrow, Zacks will have a fully detailed earnings report for both DNKN, and SBUX.

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