It was two years ago that Starbucks (SBUX) started on its strategic plan to grow through multiple distribution channels. And it has done very well! If you are interested in investing in Starbucks the first thing you need to become familiar with is its three primary attributes that drive the continued success of the company:
- Coffee will always be at its core.
- Relevant, timely, and courageous innovation will always remain at the forefront of the company.
- The company's values will always be honored.
These are great attributes and the company has always honored them. As we get closer to the start of the second quarter of 2013 I see some pros and cons for investing in Starbucks. It has some great possibilities but also have some great challenges that I would like to look at and let investors make their own investment decision.
Why would anyone be interested in investing in Starbucks? Here are some things the company has going for it.
Rapid Growth in China- China and the whole Asian Pacific region continue to post strong annual returns. It now has 11 straight quarters of double-digit store sales growth. Even though we can see a slowdown in sales for 2012 compared to 2011 for the China/Asian Pacific region, its growth rate still leads compared to the Americas and EMEA regions. We saw an economic turn down in China 2012 which can explain the region's slowdown in sales. If the economy picks back up in China and the whole Asian Pacific region, we may see Starbuck's sales numbers also grow exponentially.
Flourishing CPG business- The CPG business reflects everything outside the Starbucks's stores like packaged coffee, food service operations, K-Cups, Starbucks VIA Ready Brew and Tazo tea. The CPG business is expected to increase revenue in the existing stores as growth drivers like La Bourange bakery goods as well as Evolution juice bottles are also in the stores
Solid turnaround in U.S. business- not only has business been good as the economy's slowly inches its way forward, but Starbucks also believes there is plenty of room for more stores as it plans to add 1500 new stores in the US region by 2015 and 3000 in the whole Americas region.
Even though the company has good things going for it, there are some cons investing in Starbucks that investors need to consider.
Poor European sales due to depressed macroeconomic conditions- it's going to be a very difficult challenge but Starbucks is trying to duplicate the American "transform agenda" and bring a long-term 15% operating margin to the European region. But it's a long term strategy and the company does not expect a huge turnaround quickly. Patience is required while Europe struggles financially.
Uncertainties about the Fiscal Cliff- although the debate over the fiscal cliff seems like history; do not be fooled, the effects of the taxes that have been implemented are still with us. The automatic tax hikes and government spending cuts continue to hurt a wide range of Americans. The fear that caused the fourth quarter of 2012 to see gross domestic product shrink by .1%, when experts predicted a 1% growth, has given the first quarter of 2013 a false sense of security as we are seeing mild and steady growth. But the markets are very fragile and 2% growth this quarter may again be choked as the government takes up the spending battle. This could have an adverse effect upon Starbucks locations.
2013 not expecting robust U.S. economic growth- Since Starbucks is a retail store and like most retail stores is dependent upon consumer discretionary spending, operations will always be sensitive to changes in macroeconomic conditions. Some challenges that stores could face are things like: job losses, increased fuel prices, energy prices going up, higher interest rates and taxes…etc. Changes in these economic conditions for short or prolonged periods of time will have an adverse affect on each individual store depending on where it's located. With a slow growth economy in 2013 in the United States, the company is not expected to set any growth records.
Starbucks' chart is very interesting. After a long negative divergence MACD indicator and an extremely weak one in the RSI indicator, the stock dipped in a textbook fashion below the middle Bollinger band and below the 40 day moving average. But, the bears could not hold on as the stock fought its way back up to new highs in March and I will be interested to see if this new high that is flirting with the upper Bollinger band will continue to move or it will be the peak of a reversal pattern like I a "head and shoulders" for example. It is too early to tell but if the stock follows the markets, it is possible we could see it move up again this week.
2013 and Beyond
Starbucks continues to look for 10 to 13% growth through the year as individual stores should see mid-level single-digit sales growth (in comparable stores). Its CPG business is expected to anchor continued growth and boost sales in existing stores. As the Chinese economy gets back on track and the Asia-Pacific region continues to grow, Starbucks has expanded its plans to add an additional 1300 stores. These are the good things that investors can count on if they expect to put some money in the company. But there are many uncertainties right now, from Europe to the American economy this year. Relying on consumer discretionary spending, the company will follow the success of the region's economies and so will its investors.