The end of this year and the beginning of 2013 are shrouded in mystery. The fiscal cliff and rising tax rates loom, and according to the Mayan calendar, on December 21st the world will end. But for those of us who aren't Mayan, 2013 is still something that must be planned for. For investors, finding growth in 2013 may be the largest challenge considering the problems the economy faces. One of the companies that has used 2012 to position itself for great potential growth in 2013 is Starbucks (SBUX). Starbucks has used 2012 to make some key strategic moves that may offer investors great growth in 2013.
The year 2012 was one where Starbucks saw the growth and continuation of some of its new products. According to the Q4 conference call, Starbucks saw continued growth in its K-cups and VIAs. In fact the VIAs themselves grew 50% in fiscal year 2012 and took 7% market share in their category. This is one example of why Starbucks' Channel Development is so important for growth. In FY2012 the Channel Development business increased revenues by 50%. Schultz seems dedicated to continue the business by introducing new products to consumers. Starbucks has been able to execute very well when it comes to introducing these new products as well. This will be one key to its growth in 2013. In fact, Starbucks plans to double its Development channel footprint by 2015.
The Channel Development business of Starbucks will only accelerate due to the acquisitions Starbucks made in 2012. Starbucks has made some key acquisitions that support a lot of the strategic visions Schultz has for the future of Starbucks. The first acquisition that expands the products Starbucks will be offering is that of La Boulange Bakery. This will allow Starbucks to offer more bakery goods to its customers. The company plans to roll out its new bakery products in Spring 2013 to 25,000 locations in the United States. The performance of these products will be something to monitor during the course of the year.
Another important acquisition made in 2012 was that of Teavana (TEA). This is a huge acquisition for the future of Starbucks. This acquisition should help shore up the planned expansion into Asia and India. Tea is an extremely popular beverage in these two regions. In 2010, China consumed 2.4 billion pounds of tea, more tea than the any other country in the world. The average Chinese citizen consumes 400 cups of tea per year. This may explain why Starbucks sees the Teavana acquisition as important to its commitment to have 1,000 new stores in China by the end of 2013. By 2014, Starbucks plans to have China be its largest market. The fact that Starbucks plans to sell beverages in its Teavana stores may be a move to grow market share overseas and in the United States. This is a good decision considering that the population of China consumes 16 times more tea than coffee. While I have long-term reservations about the Chinese economy, which I have discussed previously here, it is still a market that could lead to serious growth for Starbucks in the next one to five years.
Is Starbucks Overvalued?
I would argue that Starbucks is a great buy at its current levels. The reason is due to the growth that Starbucks is projected to have in 2013 and beyond. Currently, Starbucks P/E ratio is about 24 times forward earnings. This is higher than the S&P 500, which is at around 18.5% forward earnings. But if you look at the growth rate of Starbucks and the S&P, Starbucks looks like it may be a steal. The mean projected EPS growth for 2013 is 20%, which is more than double the EPS growth of the S&P at 7.6% and the 7.2% EPS growth of the Restaurant and Bar industry. This gives Starbucks a PEG ratio of 1.2. Compare that to the 2.4 PEG ratio of the S&P and the industry's 2.6 PEG. As long as earnings growth continues to be between 15% to 20%, Starbucks looks like a very attractive buy.
I believe Starbucks will hit its growth projections. The acquisitions, product portfolio, and global diversification may help the company find serious growth in 2013. This is especially true if the Chinese economy begins to pick up again.
Risk to Starbucks
It is inappropriate to look at Starbucks without looking at the risks that it faces. The largest immediate risk is that of the Teavana acquisition. Glaucus Research released its findings about the high pesticide levels in Teavana tea. This could put the acquisition at risk and delay the implementation of the aggressive strategy Starbucks has chosen to pursue. I believe Starbucks will follow through with the acquisition, but there is a strong chance the deal may fall through.
Another serious risk to Starbucks is the failure to revitalize its business after the slowdown in traffic it saw during the middle of FY2012. If Starbucks sees a deterioration in traffic again during 2013, the company may see its growth slow. This could be caused by consumers deciding to cut back on expenses, including their daily Starbucks visit.
A third risk Starbucks faces is that of its new products. If consumers do not adopt any of the company's new offerings, the acquisitions Starbucks made in 2012 may actually prove to be a large waste of money. This is particularly true in its overseas markets. If Starbucks is unable to expand market share overseas, it will not be able to meet its expansion goals and could fall short of its earnings growth guidance.
Starbucks is very well positioned for 2013. With its aggressive expansion goals, smart acquisitions, and projected earnings growth, investors may get a real jolt from what the company is brewing.