Starbucks (SBUX) Japan Could Represent Up to 8% of Total Revenue, RBC Capital Comments

RBC Capital analyst David Palmer weighed in on Starbucks (NASDAQ: SBUX) after the company announced plans to purchase the remaining 60.5% of Starbucks Coffee Japan, ltd. In year one, Starbucks expects the deal to be slightly accretive to EPS and margins, but will likely be dilutive to the revenue growth rate.

"While the company provided limited detail around its performance in the region, Starbucks Japan should represent ~7-8% of total revenue," Palmer commented. "Over time, we see the opportunity to accelerate revenue growth through Channel Development (CPG) and unit growth. In addition, we believe the Teavana brand will be an important part of the growth story in Japan, given the high relevance of tea in the region."

Overall, Palmer sees many opportunities to sustain 10% revenue and high-teens EPS growth. "We believe sales layers including 1) Teavana tea , 2) carbonated soft drinks, 3) evolution fresh juice, and 4) La Boulange branded lunch will enable the chain to sustain its SSS momentum in F4Q14 and through FY15. We also believe Starbucks' new management structure shows that the company has become increasingly focused on operational excellence. Along with sales layers and share repurchases, we believe margin initiatives can help the company to translate 10% revenue growth into high-teens EPS growth. We note that its EPS guidance conservatism reflects additional brand investment along with the absence of commodity tailwinds next year (60% of FY15 coffee locked)."

The firm maintained an Outperform rating and price target of $88.00

For an analyst ratings summary and ratings history on Starbucks click here. For more ratings news on Starbucks click here.

Shares of Starbucks closed at $73.96 yesterday.

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