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SBUX Continues to Invest in China

Zacks Equity Research

World’s biggest coffee company Starbucks Corporation (SBUX) recently opened the Starbucks Farmer Support Center in Pu’er, China in order to ensure its supply of premium arabica coffee in the long run.

The experts and agronomists at the Starbucks Farmer Support Center will extend their resources and expertise pertaining to the best coffee growing practices and processing methods, accumulated from all over the world.

With 700 stores across 50 cities, China is a very important market for Starbucks. The company believes China will become its second-largest market by 2014 and expects to have 1,500 stores in 70 cities in 2015. The Starbucks Farmer Support Center in Pu’er will support this store expansion objective by supplying the huge amount of premium quality coffee required.

A peer of Green Mountain Coffee Roasters Inc. (GMCR), Starbucks has been witnessing strong performance in the China-Asia-Pacific (CAP) segment. In fact, net revenue grew 28% in the fourth quarter of 2012, driven by a 10% rise in same-store sales and new store openings. The segment will have 4,000 new stores by the end of 2013, of which 1000 will be opened in Mainland China, 1000 in Japan and 500 in Korea.

We are positive about the company’s long-term plans. We appreciate Starbucks’ strong market position, new product launches, rapid growth in China as well as a solid turnaround in its U.S. business. Following the solid fourth quarter results, Starbucks upped its forecast for earnings, operating margins and global net new stores for fiscal 2013. However, poor sales in Europe due to depressed macroeconomic conditions keep us on the sidelines.

Starbucks carries a Zacks #2 Rank in the near term (Buy rating). Currently, we have a Neutral recommendation on Starbucks over the long term.


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