Good News and Warm Brews: Starbucks’s 1Q16 Margins Expand

Good News and Warm Brews: Starbucks's 1Q16 Margins Expand

(Continued from Prior Part)

EBITDA margin

Starbucks’s (SBUX) EBITDA margins have expanded over the years. With 1Q16 earnings out, there are some positives for the company’s margins as they continue to expand.

1Q16 results

In 1Q16, Starbucks’s EBITDA margins came in slightly better than the year before at 24% from 23.6% in 1Q15. These margins were also better than analysts’ estimates of 23.5% in 1Q16. This significant expansion is a result of increasing sales leverage and increasing same-store sales growth. Sales leverage increases for a restaurant when it’s able to sell more through its retail stores. This way, fixed costs for occupancy and utilities spread out across a higher sales volume.

Over the next four quarters, analysts are predicting the company’s margins to expand further to 24.6%. We believe the magin expansion will come from leveraging the company’s online sales as well as other technologically driven initiatives. We’ll discuss these more in the next part of this series.

An alternative way to access Starbucks is through the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY invests about 4% of its portfolio in Starbucks. It also has holdings in other restaurants, such as McDonald’s (MCD), Yum! Brands (YUM), and Chipotle Mexican Grill (CMG).

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Starbucks Beats 1Q16 Expectations, Still Down Year-to-Date

• Part 2 - Why Starbucks’s 1Q16 Revenue Missed Estimates

• Part 3 - Starbucks Reports Strong Same-Store Sales Growth in 1Q16