uploads///SBUXs Operating Margin Trend by Segments

Must-Know: How Starbucks’ Margins Are Improving

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Nov. 3 2015, Updated 4:08 p.m. ET

Operating margin

In 4Q15, Starbucks’ (SBUX) operating margin declined slightly to 20% from 19.5% in 4Q14. The decline in margins was particularly due to the company’s investments in digital initiatives as well as taking over Japanese units.

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Americas segment

  • The Americas segment’s operating margins continue to expand, with 4Q15 margins growing to 24.8% from 24.4% in 4Q14.
  • Starbucks has created several avenues for increasing sales in the Americas segment, which includes offering food items, Mobile Order and Pay, continuous product innovation, and expansion of its loyalty and Stars programs.
  • These initiatives have rewarded Starbucks and have the potential to continue adding value to the company.
  • For example, Starbucks’s Mobile Order and Pay is just in its beginning stage. It allows customers to place an order in advance and pick it up later.

Currently, Starbucks forms about 3% of the Consumer Discretionary Select Sector SPDR (XLY). XLY also invests 3% of its portfolio in McDonald’s (MCD), 1% in Chipotle (CMG), and 0.3% in Darden (DRI).

CAP segment

  • CAP segment margins contracted to 19.9% from 33.5% in 4Q14.
  • This huge impact was due to the Japan acquisition that took place in the first quarter of 2015.
  • Japan units were licensed prior to the acquisition, so high margins are not as surprising.
  • Excluding the impact of the Japan acquisition, Starbucks’ operating margins in the CAP segment grew 1.9% during the quarter.
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EMEA and other segments

  • The EMEA segment’s operating margins rose to 17.2% in 4Q15 from 12.06% in 4Q14.
  • Margins for the EMEA segment increased as a result of the company moving toward licensed stores. This shows the opposite effect of the CAP segment, where moving to licensed stores had fewer overheads and thus higher margins.
  • The segment’s channel development operating margin increased to 43.2% in 4Q15 from 43% in 4Q14.
  • The company attributed this margin expansion to cost savings achieved through its partnership with PepsiCo.

Looking forward

Starbucks’ earnings per share felt pressure from the Japan segment acquisition, but this isn’t necessarily negative for the company. The company expects full-year non-GAAP[1. Generally accepted accounting principles] EPS to come in the range of $1.87–$1.89 in 2016, which would translate into an EPS growth rate of 18% to 19.6%.

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