A few days ago, I was reading an article by Matt Doiron regarding insider buying. An attraction to finding stocks with insider buying is that over the long-term they tend to outperform the market. In another article by Meena Krishnamsetty she states "In raw returns, insider purchases beat the market returns by 11.2% per year". Even though I don't believe this is the only reason to buy a stock, it does provide a level of confidence in that management believes in what they are doing and will put their money behind it.
The article by Matt Doiron specifies that an insider for Starbucks Corporation (NASDAQ:SBUX) has recently purchased shares in the company. According to the article "Robert Gates, former U.S. Secretary of Defense" has recently purchased 3,300 shares of Starbucks at a price of $60.49 per share.
I have watched Starbucks grow over the past twenty years or so like the rest of North America, and have found it intriguing to speculate as to why insiders are interested in purchasing a stock that has had such a remarkable run-up over the last few years. The question is, why now?
Since Howard Schultz regained his status in January 2008 as Starbucks CEO, he has proven to be very decisive in his plans to retool and grow the company.
As part of his aggressive approach, he conceived a plan to create a full-fledged transformation of the company so that it could return to profitable growth. In the 2009 annual report CEO Howard Schultz states that Starbucks needs to "improve the state of our business through better training tools and products; renewing our attention to store-level economics and operating efficiency; reigniting our emotional
attachment with customers; and realigning Starbucks organization for the long term".
Some aspects of the plan included adding food and drink items, getting into supermarkets and making the stores more convenient, focusing on global diversification and devising creative payment methods all without forgetting the core of the business.
Using some key metrics of profitability, I will analyze CEO Howard Schultz's success in returning profitability to Starbucks. From this analysis we will get an understanding of how successful Howard Schultz's plans to retool the company's focus and philosophy have been.
1. Earnings = Sales x Profit Margin
- 2009 - $9.775 billion x 4.00% = $391 million
- 2010 - $10.707 billion x 8.84% = $946 million
- 2011 - $11.700 billion x 10.65% = $1.246 billion
- 2012 - $13.300 billion x 10.41% = $1.384 billion
- 2013 TTM - $14.023 billion x 10.80% = $1.514 billion
Since 2009, Starbucks earnings have increased significantly. One of the key drivers for the growth for this metric is the company's comparable store sales growth. In 2009, the company's comparable store sales growth was reported at -6%. This metric has turned around drastically over the past five years. In 2012, Starbucks posted +7% growth in the same metric. This turnaround in same store sales growth has fueled a positive trend in net income. Since 2009, Starbucks net income has increased by 287.21%.
2. Gross Profit Margin = Gross Income / Sales
From the numbers below we can see that the margin is stable and quite strong at 56.81%.
- 2009 - $5.450 billion / $9.775 billion = 55.75%
- 2010 - $6.249 billion / $10.707 billion = 58.34%
- 2011 - $6.751 billion / $11.700 billion = 57.70%
- 2012 - $7.486 billion / $13.300 billion = 56.29%
- 2013 TTM - $7.967 billion / $14.023 billion = 56.81%
3. Operating Margin = Operating Income / Total Sales
Compared to 2009, the operating margin has increased significantly. In 2009, the company reported an operating margin of 4.50%. In 2013 TTM, the company reported an operating margin of 14.01%. This represents a substantial growth in efficiency within the company.
- 2009 - $440 million / $9.775 billion = 4.50%
- 2010 - $1.271 billion / $10.707 billion = 11.87%
- 2011 - $1.525 billion / $11.700 billion = 13.03%
- 2012 - $1.787 billion / $13.300 billion = 13.44%
- 2013 TTM - $1.965 billion / $14.023 billion = 14.01%
Starbucks focus on internal cost management and improving efficiency has enabled Starbucks to "deliver record margins". According to the company's Q2 report this metric is still increasing as the "operating margin expanded 180 basis points to a Q2 record 15.3%".
4. Net Profit Margin = Net Income / Total Sales
Like the other margins listed above, the company's net profit margins have significantly increased over the past five years. In 2009, Starbucks posted a profit margin of 4.00% while in 2013 TTM the company posted a profit margin of 10.80%.
- 2009 - $391 million / $9.775 billion = 4.00%
- 2010 - $946 million / $10.707 billion = 8.84%
- 2011 - $1.246 billion / $11.700 billion = 10.65%
- 2012 - $1.384 billion / $13.300 billion = 10.41%
- 2013 TTM - $1.514 billion / $14.023 billion = 10.80%
5. ROA - Return on Assets = Net Income / Total Assets
When comparing Starbucks 2013 TTM ROA to its 2009 ROA, we can see that the percentage of return on assets is significantly higher. The current ROA of 17.92% is above the 2009 ROA of 7.01%.
- 2009 - $391 million / $5.577 billion = 7.01%
- 2010 - $946 million / $6.386 billion = 14.81%
- 2011 - $1.246 billion / $7.360 billion = 16.92%
- 2012 - $1.384 billion / $8.219 billion = 16.84%
- 2013 TTM - $1.514 billion / $8.503 billion = 17.81%
As the 2013 TTM ROA of 17.81% is above the 5-year average of 14.67%, this implies that Starbucks has become more efficient at using the company's assets to generate earnings.
6. ROE - Return on Equity = Net Income / Shareholders' Equity
- 2009 - $391 million / $3.046 billion = 12.84%
- 2010 - $946 million / $3.675 billion = 25.74%
- 2011 - $1.246 billion / $4.385 billion = 28.42%
- 2012 - $1.384 billion / $5.109 billion = 27.09%
- 2013 TTM - $1.514 billion / $5.321 billion = 28.45%
Much like the ROA, the ROE has also revealed significant strength when compared to 2009. When comparing the 2009 to the 2013 TTM ROE, we can see that the percentage has strengthened. As the ROE has gained strength over the past five years, this reveals that there has been an increase in how much profit has been generated compared to the amount that shareholders have invested.
7. Free Cash Flow = Operating Cash Flow - Capital Expenditure
Over the past five years we can see that Starbucks has posted positive cash each year. This is a strong signal of the company's financial strength as Starbucks capital expenditures have been increasing. This indicates that Starbucks is growing at a pace that it can support, without adding additional risk to the company and ultimately the shareholder.
- 2009 - $1.389 billion - $446 million = $943 million
- 2010 - $1.705 million - $441 million = $1.264 billion
- 2011 - $1.612 billion - $532 million = $1.081 billion
- 2012 - $1.750 billion - $856 million = $894 million
- 2013 TTM - $2.547 billion - $1.027 billion = $1.520 billion
Using the key metrics of profitability listed above, it is clear to understand why insiders are still buying Starbucks. Over the past five years Starbucks' transformation has been remarkable. Starbucks' net income is up an incredible 287.21% compared to 2009. Starbucks gross margins are at a very stable 56.81%, also, the company has increased its shareholder value and its return on equity. To maintain its growth moving forward the company currently has $1.520 billion in free cash. All of the metrics above indicate a company that is getting stronger.
Moving forward, Howard Schultz has a clear vision to extend the company and keep providing results for shareholders. In a must see 2011 interview Howard Schultz talks about how the company grew, some of the mistakes they made in the past and where the company is going.
He stated in the interview that the model moving forward is "Starbucks can seed and introduce new products and new brands inside our stores." then, "we can draft off of our stores into ubiquitous channels of distribution and then integrate that into the capability and the discipline we have around social and digital media." The next step to keep the costumer interested is by employing a "Integrated a reward system, in a way that has never been done before, between our retail stores and the wholesale channel."
Howard Schultz also talks about growth in emerging markets which include China, Brazil, Vietnam and India. As China is a massive market that wants the Starbucks brand, he is focusing on growing the brand there. But he states, this move must be done with discipline as he compared it to the "Gold Rush". "We don't have a rollout plan for 140 of those cities (in China), but we strongly believe that the discipline and the process are in place for us to execute a very big growth plan in China, learning from the mistakes we made in the US."
As Howard Schultz brings the Starbucks brand to the Emerging Markets and uses the same techniques and thoughtfulness that he has brought to the U.S. market since his return as CEO in 2008, it is evident why insiders continue to invest in Starbucks.