As we all know, Starbucks Corporation (NASDAQ:SBUX) is the largest coffeehouse company in the world. It's successfully built a cult-like base of customers who are willing to pay higher prices for quality "handcrafted" beverages, which are served in its upscale bistro-like setting. Today, there's an astonishing 18,000 SBUX stores on seven continents and 61 countries. Even more impressive is its weekly customer flow of 70,000,000 people. With numbers like this, the organic growth opportunities are seemingly endless.
As discussed below, SBUX could very well be the near-perfect investment. Its diversification into new markets and new products is a huge positive, and will insulate the company from future economic downturns and even pesky competition in its retail store sector.
By way of example, in 2008, citing a weakening economy, and the cannibalization that was occurring from stores being too near to each other, it announced the closing of 5% of its U.S. locations, which involved more than 600. Investor confidence was shaken, and the doomsayers talked of SBUX disappearing altogether.
It's VERY unlikely that this kind of scenario will occur again because of its intelligent and innovative diversification, and by correctly emphasizing international growth through new store openings, and domestic growth by expanding into different product lines. It's interesting to note that on the day of the 2008 downsizing announcement, SBUX shares closed at $15.72. SBUX closed Monday, 2/4/2013 at $56.09.
In its retail stores SBUX sells more than 30 unique blends of coffee, teas, coffee related merchandise, and fresh food including pastries, sandwiches, salads, fruit cups, yogurts and even oatmeal.
In addition to its retail store operations, SBUX coffee products are sold in major food and drug retailers and the product line includes a large variety of gourmet ground coffee, roasted coffee beans, and ready to drink coffee mixtures such as bottled Frappuccino® and Starbucks Doubleshot® Energy+Coffee drinks.
Leveraging its powerful brand name, and its enormous customer base, it introduced its single-cup espresso machine, Verismo® in March, 2012. In addition to the machine, residual income is created through the coffee and milk pods that are sold along with the machine. Production of the unit is handled through a strategic relationship with Krueger GmbH & Co. in Germany.
By the end of 2012 more than150,000 of these machines were sold at a hefty retail price of $200-400 each. These units are available at SBUX stores, on-line and at specialty retailers such as Macy's, Williams Sonoma, Bed Bath & Beyond and Sur La Table.
Another income producing niche is its "Starbucks Gift Card." As testimony to its powerhouse brand status, in 2012 the Starbucks Gift Card was perhaps the nation's single most frequently given holiday gift, with one in 10 U.S. adults receiving one.
Spectacular Results: Channel Development and Emerging Brands
The company's "Channel Development and Emerging Brands" division focuses upon increasing distribution through Consumer Packaged Goods (NYSE:CPG), and growing the company's retail presence through foodservice, licensing and franchising.
Since outlining its plans in 2011 to achieve accelerated growth in this division, it's become the company's second-largest operating segment, growing 50 percent to $1.3 billion in revenue in fiscal 2012.
SBUX has projected that by 2015 the international Channel Development footprint will double, and will eventually rival the SBUX retail store portfolio in terms of size and profitability.
This growth, and more importantly, its diversification away from company owned retail stores should provide it with insulation from any macroeconomic turn downs such as what occurred in 2008. This strategy, in my view, has enormous upside and no visible downside. Shareholders should be pleased.
Stellar Emerging Market Growth: China, Vietnam, Asia Pacific
The SBUX China, Vietnam & Asia Pacific expansion continues to move at an accelerated rate, putting it on track to become the Company's second-largest market by 2014. Here is a bullet point summary of what's projected:
√ 4,000 Stores by the end of 2013 (Includes 1,000 in Mainland China, 1,000 in Japan and 500 in Korea)
- 1,500 Stores Projected In China by 2014
- 3 Stores Opened in Mumbai, India, since October, 2012
- First Store to Launch in Delhi, India in Early 2013
- Vietnam: Flagship Store Opened 2/1/2013
Vietnam represents a high-powered growth opportunity for SBUX not only because of the demographics of the country, but because of its exclusive licensing agreement with the Hong Kong Maxim's Group subsidiary, Coffee Concepts (Vietnam). What's significant is the successful track record of the Hong Kong Maxim's Group, which already operates over 760 SBUX stores in Hong Kong and in China.
The Teavana Acquisition - Logical And Global Oriented
Founded in 1997, Teavana was, in my view a made to order for SBUX. All things considered, the $620 million acquisition cost for the 300 mall-based Teavana stores would appear modest.
Teavana offers tea connoisseurs and new tea enthusiasts a unique retail experience where very passionate, knowledgeable and super sales oriented "Teaologists" engage and educate them about the ritual and enjoyment of tea. In addition, stores maintain inventories of high-end tea oriented merchandise, which are not generally found at other retailers. And the prices aren't cheap. On my first visit to one of the stores, I spent nearly $300.
Starbucks has pledged to grow and extend Teavana's mall-based stores, and it's planning to add a high-profile neighborhood store concept.
Internationally, the Teavana growth opportunities would appear to be a no brainer. Considering the existing SBUX global infrastructure market penetration and growth could happen quickly.
In addition, the markets in the Far East, China and India, where demand for tea far outweighs coffee, could be a boon for SBUX and its new brand.
In fact, SBUX estimates that Teavana will add one cent per share to its full-year 2013 EPS.
So Where are the Negatives?
While everything about SBUX appears positive and on the up-swing, there are several negative factors that investors should be aware of. In my view, these challenges are those found in the "normal" course of business. I don't believe Howard Schultz has sleepless nights over them, but investors should be aware of what critics are saying.
It's been said that SBUX is having difficulty penetrating Europe's "cafe culture," so much so that the company is considering scaling back its European presence. In France, critics have suggested that the SBUX "taste" is considered "too charred" for French palates.
Also, in Europe the company is also facing higher real estate and labor costs, which could compress operating margins.
Competition in the USA continues to grow with a number of competitors, especially niche competitors such as Coffee Bean & Tea Leaf and Caribou Coffee.
McDonald's recently announced plans to sell bagged coffee in its Canadian stores, and observers believe this could be a prelude to a similar marketing campaign in the U.S., and its McCafe could have a negative impact on SBUX retail store sales.
And then there are other SBUX competitors in the coffee beverage market, including 7-Eleven, Dunkin Donuts, BIGGBY Coffee, Panera Bread and Einstein Bagels.
In our free market system, success will be emulated and it's part of business. In my view, the SBUX model has fared extremely well in the face of competition.
Fiscal Q1 Statistics (Fiscal Year Ends December)
Despite the headwinds of a relatively weak global climate during 2012, SBUX was able to deliver extraordinary results for Q1. As stated by Howard Schultz, Chairman, President & CEO, "Our Q1 results demonstrate the strength, unique resilience, and increasing relevance of our global business and brand."
- The 2012 Holiday Season was the Strongest in Its 42 Year History
- Record Quarterly Revenues Totaled $3.8 billion
- Operating Margins Increased to 16.6%
- Earnings were $.57 Per Share - the Highest in History
|Closing Price 2/4/2013||$56.09|
|Annual Dividend Per Share||$0.84|
|Next Ex-Dividend Date||02/05/13|
|52 Week High||$62.00|
|52 Week Low||$43.04|
|5 Year Growth Rate||28.39%|
|Current Year Est. EPS||$2.16|
|Next Year Est. EPS||$2.62|
|Compiled by Craig Van Pelt|
SBUX Analyst Ratings
|Rating||Current||1 Month Ago||2 Months Ago|
SBUX Analyst Price Targets: (Most recent estimate 1/20/2013)
|Analyst Price Targets|
As mentioned in my introduction, SBUX could well be the near-perfect investment. Philip Fisher, the legendary investor once said: "The best time to sell a stock is never." Perhaps this theory is applicable to SBUX.
Its retail store business model has been successful throughout the world, and the continued expansion of it in emerging markets is happening right now. When you add to the mix, the Teavana opportunity, the Verismo® espresso machine, the growing distribution of its Consumer Packaged Goods, plus the opportunity of introducing profitable and innovative new merchandise to its customers, it would seem that SBUX could be a very long-term "hold" that will reward investors for many years to come.