Buy Starbucks: Highs Are Ahead

| About: Starbucks Corporation (SBUX)

Starbucks Corporation (NASDAQ:SBUX), for some time has been one of my favorite global growth stories. The company is firing on all cylinders here in North America and continues to strengthen its foothold around the world. Shares are up roughly 15% since I first recommended that long term investors buy the company at the start of the year in my article "Starbucks To Set All Time Highs In 2013". In this article, I would like to reiterate my Buy rating and explain why I believe shareholders will continue to be rewarded in the future. We will take a look at the company's global growth prospects, the expansions of the new acquisitions, the growing loyalty to the brand, the expansion of the "ready to drink" business segment, managements plans to return even more money to shareholders in the future, and regression analysis.

Global Growth

In the last quarterly report, the company highlighted its strong global performance. Global comparable store sales grew 6%, driven by a 4% increase in traffic and a 2% increase in average ticket, marking the 13th consecutive quarter of global comp growth greater than 5%.

Starbucks reported strong results from its Americas segment. The company was able to grow net revenues by 10% in the quarter due to the strong comparable same store sales growth of 6% as well as strong incremental returns from its new store openings over the last 12 months. Operating Margins grew by 220 bps to 21.1% on the back of multi-year low coffee prices. The company should continue to see strong margins as its purchase contracts renew at lower prices. On the conference call, the company announced it expects to add 3,000 new stores in the Americas over the next five years with at least 1,500 being in the U.S. and that they are now on track to open over 300 new stores in the U.S. this year alone. The majority of these new locations will incorporate the drive through option. By giving consumers this option, the company will begin to take market share away from Dunkin' Donuts (NASDAQ:DNKN) whom currently dominates this market. I believe we will see higher ticket sales as a result of increased food spending at these new locations.

Starbucks is currently seeing exceptional results from its China and Asia market segments. In the quarter the company was able to add 64 new locations and was able to grow its revenue by an astounding 22%. This revenue growth was a result of the new locations as well as strong comparable same store sales. The company is beginning to expand into the relatively less populated cities of China to meet the growing demand for its products. These new stores have seen overwhelming traffic in many locations without any prior marketing or advertising. Expansions into these relatively smaller cities should provide ample fuel to sustain high growth rates over the next 5 years. Operating margins did decline by 710 bps for two main reasons. The first, an increase in investment spending, and second, a shift into more company-operated stores. By 2015, it is expected there will be over 1,500 locations in 70 different cities, making China the second largest market for the company. Realistically, I could see China becoming the company's largest market as the company works to meet the increasing demand for caffeine.

In addition to China, the company will open 100 new stores in Indonesia in the next three years and another 100 stores in the Philippines over the next four. In the second quarter the flagship store in Ho Chi Minh City, Vietnam was launched to strong demand. I believe these markets will provide strong growth in the future as the demand for coffee in this region is rising and Starbucks is position to take advantage.

Expansions of Acquisitions

Being a Bay Area native myself, I was very familiar with the La Boulange brand. Like Starbucks, La Boulange offers patrons luxury products and experiences. I was very impressed by the traffic I would see come into my neighborhood locations. When Starbucks announced they purchased the company last year, I was convinced since the beginning the brands would sync well. Starbucks has leveraged its business and begun incorporating La Boulange products in many of their Bay Area locations. By 2014, it is expected we will see all U.S. Starbucks locations sell these products. I feel Starbucks could easily expand the number of La Boulange locations throughout major metropolitan cities such as Seattle, New York, Boston, and Los Angeles.

Starbucks is now working to meet the high demand for its Evolution Fresh products. Evolution Fresh is currently in roughly 4,000 locations but this number is expected to rise to 8,000 by the end of this year. By further diversifying the business to offer consumers a quick healthy alternative to coffee, Starbucks has further differentiated itself from its competition.

The expansion of Teavana, has been going very well. The company is now putting its plans in place for the full expansion of the brand into non-mall locations. Over the next year, the company should begin rolling out the new neighborhood locations which will provide patrons a place to enjoy handcrafted luxury teas. These neighborhood locations are key for the growth of Teavana here in the U.S. as they look to dominate the $40 billion global tea market. I believe Howard Schultz will successfully reshape the tea industry as he has with coffee. Over the long run, should Teavana be received well here in the U.S., I would expect Starbucks to leverage its Asian foothold and take the Teavana brand overseas.

The Growing Loyalty to the Brand

Starbucks foothold in China can be seen by the rapid success of its rewards program in the country. The company has now sold over 2 million My Starbucks Rewards cards in China representing an average of 2,000 members per store and the highest first store average anywhere across the global retail system. On the most recent conference call, the company was very bullish when discussing the future of the rewards program. Currently there are over 6 million rewards members and executives believe there is the possibility of multiplying the current rewards base by 10. The company plans to further integrate the rewards program across all products to create further brand loyalty. For example, Teavana customers can now gain Starbucks rewards on all purchases. By rewarding loyal customers, Starbucks is maintaining and growing the cult following. Down the road, this loyalty should translate into higher average ticket sales as the company expands its offerings. Further investment in the rewards program is necessary to ensure future growth.

Expanding "Ready to Drink"

Starbucks is looking to rapidly increase sales of its "ready to drink" products. The company has plans to greatly increase its selection of products over the course of the year starting with the new line of iced coffee. The new line of bottled iced coffee will come in four flavors: Iced Coffee + Milk, Low Calorie Iced Coffee + Milk, Vanilla Iced Coffee and Caramel Iced Coffee and will hit shelves at $1.99.

On the conference call, Jeff Hansberry, President of Channel Development, stated he was very optimistic that the other new innovations, being announced later this year, would be well received. My hunch is these new innovations will possibly involve Teavana, refreshers, or the newest luxtury soda being trialed in some locations. I believe all three of those options would be received well by consumers and aid in growing the cult following to the brand.

Recently, the company announced it will be rolling out "ready to drink" products throughout grocery stores in mainland China. The company must be confident its brand has gained enough strength in the region to support these offerings which is very bullish for the company over the longer term.

Returning Money to Shareholders

In this low rate environment, investors should be grateful for a safe yield. As a result of quantitative easing, interest rates have plummeted and investing in bonds isn't an attractive option for most investors. Starbucks currently pays shareholders a quarterly dividend of $0.21 or roughly a 1.4% dividend yield. In combination with this dividend, the company has authorized the repurchase of 26 million more shares in addition to the 3 million purchased last quarter. Since the start of this fiscal year, the company has returned over $850 million to shareholders. Management, backed with a rock solid balance sheet, has the fully capability to raise the dividend payout ratio much higher in the future.

Regression Analysis

Here are the results of the price to earnings, price to sales, and price to book regressions. 17 companies were used in the analysis:

Price to Earnings Regression
Predicted Price $67.28
R-Square 0.74
Price to Sales Regression
Predicted Price $59.00
R-Square 0.53
Price to Book Regression
Predicted Price 62.00
R-Square 0.79

The results indicate Starbucks is a weak buy.


  • Operating margins have been helped by the steep drop seen in coffee bean prices. Should prices start to rise, margins would be hurt as the new purchase contracts begin to take effect.
  • As with any company exposed to China, there is the risk of regulatory exposure in the region.
  • Dunkin' Brands does have plans for an expansion into the western U.S. markets in the coming years. It is yet to be seen how market share in these regions will be affected.


I reiterate my Buy rating for Starbucks and raise my price target to $67.50 which is inline with the analyst consensus price target. The company is performing well globally and is making all the right moves to sustain future growth. Management is clearly focused on rewarding both customers and shareholders of which I am both.

Disclosure: I am long SBUX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.