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Will Starbucks’ Margins Grow in 4Q15?

Adam Jones

Starbucks' 4Q15 Earnings: What Can Investors Expect?

(Continued from Prior Part)

Operating margin contribution

In 3Q15, the Americas segment contributed the most to the operating margin. It contributed 72% towards Starbucks’ (SBUX) operating income. It was followed by the CAP (China/Asia-Pacific) segment at 13%, and Channel Development at 12%. The remaining 3% came from the EMEA (Europe, the Middle East and Africa) segment. Currently, Starbucks forms about 2.3% of the iShares Global Consumer Discretionary (RXI).

The Americas

  • The Americas segment had an operating margin of 25% in the most recent quarter.
  • If you look closely, the operating margin from this region expanded over the past four years. This indicates that the company’s able to spread the cost over more volumes. This is also known as “sales leverage.”
  • This could be a result of introducing additional bakery items and breakfast sandwiches in the store.
  • With Mobile Order and Pay in place, we could see more improvement in the margins.

CAP and others

  • The CAP segment has a volatile history, but its operating margins appears to be reversing since 2Q15.
  • The operating margins in the CAP segment mainly fell due to Japan’s store acquisition.
  • Excluding the impact of the Japan acquisition, the operating margins still rose 3.7% during 3Q15.
  • You might also notice that the operating margin from Channel Development and EMEA grew.
  • Channel Development includes Starbucks’ coffee that’s sold through grocery stores, specialty retailers, warehouse clubs, convenience stores, and US Foodservice accounts—like Costco (COST) and Walmart (WMT).
  • As more people get hooked on Starbucks coffee, they will likely be encouraged to purchase Starbuck’s coffee and make it at home.

We’ll finish this series by looking at Starbucks’ valuation multiples. We’ll also compare Starbucks it with peers Dunkin’ Brands (DNKN), McDonald’s (MCD), and Yum! Brands (YUM).

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