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Can Starbucks Sustain the Momentum?

Zacks Equity Research

On Jun 10, we issued an updated research report on Starbucks Corporation (SBUX).

Though Starbucks could only meet the Zacks Consensus Estimate for earnings while missing the same for revenues in the second quarter of fiscal 2014, its strong comps despite severe winter conditions caught investors’ attention. Second-quarter results were announced on Apr 24 this year.

Adjusted earnings of 56 cents per share were slightly higher than management’s expected range and grew 17% year over year driven by strong comps and operating margin expansion across all segments. Revenues increased 9% year over year driven by store openings, successful turnaround in Europe, solid improvement in U.S. comps due to impressive food performance and robust Channel Development performance.

Moreover, Starbucks raised its earnings outlook for the year and expressed a bullish overall tone backed by the healthy performance seen in the first half. We would like to remind investors that this is the second time this year that Starbucks has raised its earnings outlook — the first being in January at the first-quarter conference call.

In addition to food/beverage innovations, loyalty program and single-serve products, we believe Teavana tea, La Boulange bakery items, Fizzio handcrafted cold carbonated beverages and Evolution Fresh juices could emerge as meaningful top-line growth drivers in fiscal 2014.

Overall, we are encouraged by Starbucks’ strong global retail footprint, successful food/beverage innovations, impressive loyalty program and digital offerings, rapid growth in international markets and solid turnaround in Europe. Moreover, La Boulange, Evolution Fresh, Teavana and K-Cups innovations are compelling long-term growth drivers.

However, difficult consumer spending environment in the U.S. and macro challenges in Europe raise concern. Also, the overall cost environment for food commodities is expected to remain under pressure in 2014/2015 due to domestic and worldwide agricultural supply and demand imbalance and other macroeconomic factors. Though management believes the rising dairy and coffee prices are manageable, it is nevertheless a concern.

Other Stocks to Consider

Starbucks carries a Zacks Rank #3 (Hold). Better-ranked restaurateurs include Burger King Worldwide, Inc. (BKW), Buffalo Wild Wings Inc. (BWLD) and Red Robin Gourmet Burgers Inc. (RRGB).While Buffalo Wild Wings sports a Zacks Rank #1 (Strong Buy), Burger King and Red Robin carry a Zacks Rank #2 (Buy).

Read the Full Research Report on BWLD
Read the Full Research Report on SBUX
Read the Full Research Report on RRGB
Read the Full Research Report on BKW

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