When I first wrote about Starbucks (SBUX) on May 9, 2012, I said the company is brewing more growth for investors. However, I had no idea that it was going to make two multimillion acquisitions that I recently discussed (La Boulange and Teavana) in the months following my first article. These deals, together with the earlier purchase of fresh juice maker Evolution Fresh, will provide a strong growth opportunity in America. Internationally, Starbucks continues to expand in Asia and overcome headwinds, especially in Europe where economic problems are far from over. This article will examine Starbucks' progress in integrating the newly acquired businesses and its other organic initiatives to expand here and abroad.
Since acquiring Evolution Fresh at the end of 2012, Starbucks has started selling the brand's products in about 2,000 Starbucks stores and in an additional 2,000 grocery stores. Starbucks is currently building a juicery in Southern California and plans to roll out Evolution Fresh juice in all of its stores in the U.S. by the end of 2014.
The cold-crafted juice category is a $3.4 billion market in the U.S. and is part of the larger health and wellness business, which is measured at about $50 billion. A public company already operating in this business is Jamba (JMBA). Jamba has a market capitalization of about $210 million and as of the latest data (October 02, 2012) had 788 locations of which 301 are company-owned in the United States (the remaining are mostly U.S. franchises). For the 39-week period ending on October 2, 2012, the company derived $174 million, or 94.5%, of its revenues from its company-owned stores. Thus, the revenue per store for Jamba is about $580K for nine months. Historically, the fourth quarter is 20% of the yearly total so let's assume that Jamba's revenue per store is $725K in 2012. Let's see how this will help Starbucks.
Assuming a fresh juice offering at Starbucks could bring in additional revenues of $300K per U.S. store per year. Also, assuming that by the end of 2014 Starbucks has 8,000 U.S. stores, just from Evolution Fresh Starbucks will derive an additional $2.4 billion in revenues. At a profit margin of 10%, this will bring in an additional earnings per share of $0.32 per year. At a price to earnings of 20 (Starbucks' price to earnings based on 2014 estimated earnings per share), this translates to $6.40 per share contribution or over 10% of Starbucks' recent stock price. While $300K of revenues from Evolution Fresh per store could be considered optimistic, the net profit margin estimate is likely too low as an incremental revenue improves the overall store profitability.
Similar to Jamba, La Boulange bakery will bring significant new revenue per store. La Boulange is currently available at 40 Starbucks stores in Northern California with plans to be available in major cities in the West and East coasts by the end of 2013 and a national roll-out by 2014. La Boulange products will be centrally made and distributed in frozen form to Starbucks stores. Most Starbucks store will require investing in a freezer as the company will be able to utilize its current turboshaft ovens.
La Boulange business can be compared to Panera Bread (PNRA), which is known for its bakery offerings. Panera has 809 company-owned stores as of December 25, 2012, which generated $1.89 billion in revenues during Panera's fiscal year. Assuming 50% of sales are derived from bakery items, this brings the total revenue from bakery items to $945 million or $1.1 million per store.
Even if Starbucks is able to generate incremental sales of $800,000 per store from its new bakery offerings, this will generate $6.4 billion of additional revenue per year or $640 million of new net income per year. On a per share basis this translates to $0.85 per share and multiplying it by the 2014 estimated price-to-earnings ratio of 20, it could generate an additional $17 per share.
The global tea market stands at around $40 billion. Starbucks acquired Teavana for $630 million in cash. This purchase was not cheap as it values Teavana at 3.75 times its sales during the year ended January 29, 2012. If Starbucks was valued at 3.75 times its most recent fiscal year sales, it would be worth about $50 billion. This is a 31.5% premium to its current enterprise value of $38 billion. However, the Teavana acquisition was not about a financial investment but more of a strategic step towards capturing higher market share of the $40 billion tea market. Starbucks will try to expand its tea offering in the following three ways and by utilizing Teavana's deep knowledge and passion about tea:
Expand its store footprint (including urban street locations) utilizing Starbucks' ability to negotiate real estate and design stores.
Integrate beverage offerings at Teavana stores by utilizing its own experience in beverage.
Integrate Teavana's offerings into the Starbucks stores in the U.S.
It is obvious that Starbucks should be able to grow the Teavana brand successfully with minimal additional capital expenditures, except the initial investment in opening new stores. Also, tea is a drink that could be consumed through the day by consumers of different ages. For example, chamomile tea is known for reducing stress and it is certainly a good choice for an evening drink at Starbucks.
In addition to revenue and earnings growth from its acquisitions of Evolution Fresh, La Boulange and Teavana, Starbucks plans to add thousands of net new stores in the next five years, according to the company's growth plan revealed at the end of 2012. Only in the Americas, Starbucks' plans to open 3000+ stores. About 60% of the new stores in the U.S. will be drive-throughs, which have comparable metrics as the traditional stores. By 2014, China will become Starbucks' second largest market. India already has five Starbucks stores and the company recently opened its first Russian Starbucks located outside of Moscow, in St. Petersburg. This is in addition to renovating thousands of existing stores in the U.S. and abroad.
It is obvious from the analysis above that Starbucks will have an accelerated growth rate as early as 2014. This will be driven from new stores and from introducing more products from the companies it recently acquired in the United States. A prolonged economic stagnation could be a headwind. However, Starbucks has a number of levers it can pull to keep customers coming to its stores. The tools Starbucks could use in case of a deteriorating consumer confidence include promotions, loyalty programs and smaller servings with lower prices.
With the La Boulange purchase, Starbucks can do to French bakery what Chipotle Mexican Grill (CMG) did to the burrito - make it available around the entire country at high levels of quality and competitive prices. In addition, top shelf tea and fresh juice will complement coffee and should further drive store sales up. Sales of Starbucks in groceries and of the company's self-serve espresso machine, Verismo, will further contribute to higher revenues.
Starbucks would almost certainly gain market share from fast food restaurants such as Dunkin' Donuts (DNKN), McDonald's (MCD), and Burger King (BKW) as well as from the large beverage companies such as PepsiCo (PEP) and Coca-Cola (KO). It will not be a surprise if Starbucks' stock doubles in the next couple of years from its exceptional positioning to grow its coffee, tea, juice, and bakery offerings.