Starbucks Gets a Jolt From Home-Brewed Coffee

The popularity of single-serve coffee machines continues to rise. According to market research firm Euromonitor International, these devices accounted for 20% of coffeemaker sales in 2011, up from just 4% in 2006.

The current leader in this segment, with about 75% of the market, is the Keurig machine from Green Mountain Coffee Roasters (NasdaqGS: GMCR). The device uses Green Mountain’s “K-Cups,” or single-serving coffee pods. When you put the K-Cup in the Keurig, it punctures the foil on the top and brews a single cup, often in under a minute.

Despite the fact that K-Cups are more expensive than buying ground or whole coffee beans, sales of the devices continue to soar.

Sensing the trend’s strong potential, Starbucks (NasdaqGS: SBUX) signed an agreement with Green Mountain in March 2011 to supply its coffee in K-Cups. This deal has been a huge benefit to the company. And now it’s taking direct aim at Green Mountain with its own single-serve coffee machine, the Verismo. More on that below.

Packaged Coffee Perked Up Starbucks’ Latest Results

In Starbucks’ fiscal 2012 fourth quarter, which ended September 30, 2012, sales at the company’s Channel Development segment, which includes its packaged coffees, jumped 32% from a year ago, to $318.5 million. The company attributed most of the gain to rising sales of its Starbucks and Tazo brand K-Cups.

That helped increase Starbucks’ overall net revenue by 11%, to a record $3.4 billion from $3.0 billion a year ago. Starbucks is also seeing strong sales at its coffee shops: global same-store sales rose 6%, including a 7% gain in the Americas and a 10% increase in the China/Asia-Pacific region. Same-store sales fell 1% in Europe, the Middle East and Africa.

Starbucks’ net income rose 0.1%, to $359.3 million, or $0.46 a share. Without $0.10 a share of one-time gains in the year-earlier quarter, Starbucks’ earnings per share would have jumped 24%. Operating margins rose to 15.4% from 14.8% a year earlier.

The latest figures beat the consensus forecast of $0.45 a share in earnings on revenue of $3.39 billion.

In light of the strong results, Starbucks raised its fiscal 2013 earnings forecast to $2.06 to $2.15 a share from its previous guidance of $2.04 to $2.14. Starbucks also increased its quarterly dividend by 24%, to $0.21 a share. That adds up to $0.84 a year, for a 1.64% yield.

Starbucks’ Verismo Machine Has Big Potential

In March 2012, Starbucks announced that it would be launching its own single-serve coffee machine, the Verismo, in time for the holiday season. As we wrote at the time, Starbucks CEO Howard Schultz went out of his way to point out that the Verismo wouldn’t directly compete with the Keurig, and would be more focused on espresso drinks than coffee. But investors weren’t buying it. Green Mountain shares plunged 15% in the wake of the announcement.

Starbucks started rolling out the Verismo in the fourth quarter; it’s now available in 6,400 of the company’s outlets, as well as specialty retailers like Williams-Sonoma and through the website. Tellingly, the Verismo’s pods are not interchangeable with K-Cups.

The company’s dominance of the coffee market, as well as its ability to distribute the machine through its vast network of stores, gives the Verismo a great chance to gain market share in the fast-growing home-brewing market. The fact that Starbucks pushed the device out well in advance of the holiday season only gives it greater potential.

Starbucks’ Other Growth Initiatives Also Look Promising

In addition to new products like the Verismo, Starbucks continues to open new stores, particularly in the Asia-Pacific region. It opened its 700th outlet in China during the quarter, and it also entered the Indian market, opening its first outlet in the country, in Mumbai, through its joint venture with Tata Global Beverages Limited.

To bolster sales at its existing stores, Starbucks has made investments in technology that lets customers pay for their java through their smartphones. During the quarter, the company announced a new deal with the Square Inc. mobile-payment service. To pay through Square, you attach a free reader to your iPhone or Android device. You then swipe your phone over a scanner at a Starbucks store to make your purchase.

The company’s growth would be slowed if the global recovery stalls, and its sales continue to lag in Europe due to the continent’s ongoing debt problems. The stock also trades at a high 28.9 times its last 12 months of earnings.

However, the Verismo should be a big winner for Starbucks, and the company has plenty more room to grow in China, India and other emerging markets. Its rising dividend is also a big plus. In addition, Starbucks frequently repurchases its own stock. Over the course of fiscal 2012, it spent $549 million to buy back 12 million of its shares. It can still repurchase 12 million more under previous authorizations.

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