Starbucks: More Than Just A Coffee Shop

| About: Starbucks Corporation (SBUX)

People who think Starbucks (NASDAQ:SBUX) is still just a large chain of overpriced coffee shops haven't been paying attention.

Starbucks now sells teas. It owns a bakery and a juice maker. It owns coffee farms. It continues to be one of the most innovative marketing machines in corporate America, with one of the strongest reputations for corporate social responsibility and employee engagement.

And Starbucks, in a way, prints its own money.

The company's Starbucks Card has become a new form of currency. In the first quarter of 2013, customers loaded $1 billion on Starbucks Cards, a 25% increase from a year earlier and a new record for the company. That figure would have amounted to about a quarter of the company's overall revenue of $3.8 billion if card loads were immediately recorded as sales.

As the company noted an on earnings call, the Starbucks Card accounted for 25% of all U.S. tender. The card's 20%-plus growth rate far exceeded overall revenue and same-store sales growth of 11% and 6%, respectively.

Starbucks also has a mobile payment strategy, with 7,000 company-operated Starbucks locations accepting Square's mobile payment application, Square Wallet, giving customers another way to enjoy a quick, seamless payment. Starbucks expects 10% of payments in Starbucks stores to be done through smartphone mobile apps by the end of this fiscal year.

500% Return Since 2009

It is the combination of the company's innovation, profitability and corporate social responsibility that has made it a phenomenal investment. Since bottoming out during the Great Recession at $10 a share in 2009, Starbucks shares have risen steadily. The company is selling at around $58 a share, with a price-to-earnings ratio of 31.

Starbucks has made the turnaround largely by improving its profit margin: Since hitting a low in 2009, operating profit margin has more than tripled to 15%.

Another area in which trends have been reversed since 2009 is in same-store sales. After posting a 6% drop in comparable sales in 2009, the company logged a 7%, 8%, and 7% increase in same-store sales for 2010, 2011, and 2012.

And the company has been able to generate large amounts of operating cash flow. Annual cash flow has doubled in five years, climbing to a rate of more than $2 billion per year.

Strong Quarterly Report

The momentum continued into its fiscal first quarter, which ended on December 31, 2012. Highlights of its first quarter included:

  • Total net revenues increased 11% to a record $3.8 billion.
  • Global comparable store sales grew 6%, driven by a 4% increase in traffic and a 2% increase in average ticket.
  • Americas comparable store sales grew 7%, China/Asia Pacific comparable store sales grew 11%.
  • Consolidated operating margin expanded 40 basis points to 16.6%.
  • Earnings per share increased 14% to a record $0.57 per share, compared to $0.50 per share in the first quarter of the previous fiscal year.
  • It opened 212 net new stores globally, including the first 3 stores in India.
  • The company sold more than 150,000 Verismo machines since they launched.
  • The company added 1.4 million new My Starbucks Rewards members in the U.S., up 86% over the 778,000 new members added in the U.S. in the first quarter of the last fiscal year.
  • Starbucks acquired Teavana Holdings, Inc. on December 31, making Teavana a wholly-owned subsidiary of Starbucks and positioning the company to become the global leader in tea.

Under the leadership of CEO Howard Schultz, Starbucks seems to be growing the right way, as opposed to the methods used prior to the financial crisis that saw the stock price hit bottom. From September 2007 to September 2008, the company's operating expenses increased 17% to $7.4 billion, while operating income plummeted more than 50% to $528 million. Revenues during the year grew at a healthy rate in each of the company's different lines, it was just taking too much money to generate those revenues. Essentially, Starbucks had over saturated the market.

Aggressive, Yet Strategic Growth Initiatives

Its current growth plans are much more strategic. In December, Starbucks laid out an aggressive growth initiative. Reading through the line items, it's clear that much of the company's growth plans have little to do with its core product, coffee, other than a goal of opening more than 3,000 new stores in the Americas region by 2017. Instead, the plans include:

  • Making China its second-largest market in 2014
  • Growing its home products line, which includes Starbucks VIA® Ready Brew, K-Cup® packs and now the Verismo System.
  • Social and digital media, loyalty and mobile payment platforms transforming customer experience and deepening connection to customers around the world.
  • A commitment to leadership position in $40 billion global tea market.
  • A commitment to profitability in Western Europe.

Starbucks says it will have 20,000 retail outlets on six continents by 2014 and more than 200,000 points of global CPG distribution by 2015.

In addition to the acquisition of Teavanna, the company's recent diversification efforts include the purchase of juice maker Evolution Fresh and bakery chain La Boulange.

The company is also working to improve its supply chain, in effect becoming more vertically integrated, by buying its own coffee farms. Starbucks recently purchased a 593-acre farm in Costa Rica to go with centers it operates in Rwanda, Tanzania, Colombia and China.

Starbucks has a solid balance sheet. Its total debt is only a tenth of its total equity. Starbucks has $1.19 billion of cash on hand, more than enough to cover its $549 million in debt.

Over the last five years, the company has achieved an annual return on assets of almost 13% and an average return on investments of 20%.

Starbucks pays an annual dividend of $0.84 a share, which currently yields 1.4%, and repurchased 11.8 million shares in the last fiscal year.

No word yet on whether dividend payments can be put on a Starbucks Card.

Additional Disclosure: Catalyst Investments is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. This information is not investment advice or a recommendation or solicitation to buy or sell any securities. Catalyst Investments does not purport to tell or suggest which investment securities readers should buy or sell. Readers should conduct their own research and due diligence and obtain professional advice before making investment decision. Catalyst Investments or anyone associated with Catalyst Investments will not be liable for any loss or damage caused by information obtained in our materials. Readers are solely responsible for their own investment decisions. Investing involves risk, including the loss of principal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.

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