Millions of people drink coffee every day. And of these people, a large portion go to Starbucks (NASDAQ:SBUX), which is the world's largest coffee company, and one that has been growing exponentially over the last few years. Today, there is a Starbucks on nearly every corner, and in dozens of countries. Within the last few years, the company has seen revenues, income, margins, and sales all increase, even in light of the global slowdown. Starbucks growth over the years has been remarkable, and now, it is all alone at the top, with its competitors far behind.
But there is more to Starbucks than just the main numbers. On a more detailed level, the results are even more impressive. The company owns just over 50% of its stores, yet these stores bring in about 79% of its revenues. There are over 18,000 locations across the globe, and this number will continue to grow.
Even given the global downturn, the company has still emphasized growth and expansion. In 2012, Starbucks opened 234 stores in the Americas, and 154 in Asia-Pacific, and 130 in China, not to mention growth in other parts of the world. For a company that is a coffee house, it is also amazing that Starbucks has managed to grow its product line, and within the last few years, non-beverage items have reached 25% of sales. Even more recently, Starbucks has begun to push items into consumers' homes: its new home-based single serve coffee machine competes with Keurig, and the company is hoping to bring the "Starbucks Experience" into the home of consumers, with the end goal of increasing brand loyalty and the bottom line.
Concern at Home?
Despite the growth and success abroad, the US still drives much of the company's revenues (about 75% in 2012), due to the large contingent of company owned stores in the US. This high concentration of revenues poses a threat to the company: any slowdown in the US market could have a large impact on the overall business. However, this also creates a great opportunity: the current dependence on the US means there is great growth potential internationally, and the upside is huge if they can continue to grow across the world.
Looking to the Future
The Starbucks umbrella encompasses more than just Starbucks locations - the company has over 7,500 licensed stores, including Seattle's Best Brand stores. In total, this gives Starbucks ownership (in some form or another) of 25,000 stores globally; compare this to McDonald's, which has around 34,000, and it looks even more impressive. And the growth is only continuing as Starbucks looks to monetize on addition markets and in new locations. Recently, it has begun launching some smaller branded stores (include 10 Seattle's Best Coffee) in parking lots to add convenience to customers. This new strategy for Starbucks could pay off, help attract a new market, and provide a new point of contact for customers.
Looking at the company from this perspective, you see a different picture from the high growth discussed earlier. Yet it is important to notice that at this point, the company has grown from nothing to thousands of stores in relatively short period of time. Today, the company will continue to grow, but most likely not at the rates we have seen historically (there are only so many street corners in the US), so they have started to increase their dividend as a result, which is not a bad thing. This is a sign that the company is realizing its past growth and future outlook, and keeping expectations realistic.
The company's financials are equally impressive as you dig deeper. As mentioned earlier, within the last five years, Starbucks has seen growth on the operating side, with both revenues and operating income. Yet it has seen even better improvement in net income and cash flow. Starbucks' net income has more than doubled since 2009, from 4% to 10.8%, and its free cash flow has increased by over 50%, from $943 million to $1.52 billion. Both of these figures just confirm what we have seen earlier: Starbucks recent growth is the real deal.
Despite the great growth, Starbucks still has concerns, especially in the form of competition. McDonald's (NYSE:MCD) has recently rolled out its McCafe brand, which is a near direct competitor to Starbucks. Additionally, Dunkin Donuts (NASDAQ:DNKN) has begun focusing more and more on coffee, and it has seen great success in growing that business. Furthermore, smaller local coffee shops open almost daily to compete with different Starbucks locations, and appeal to many who seek a unique, one-of-a-kind location. So, while Starbucks seems to have everything under control within its own borders, outside competition could pose a threat moving forward.
Can The Growth Continue?
Overall, when analyzing Starbucks from a business perspective, it is clear that Starbucks has built an empire, built on a great foundation and in sight of good opportunities in the future. Its core business is producing over $1.5 billion of free cash flow per year, and it is opening hundreds of stores each year. However, hundreds of stores is a small increase for Starbucks, and its already huge size may be its biggest weakness moving forward. There is no doubt that the company will continue to be successful, but how much farther it can grow is still to be seen. One major key moving forward will be working to improve same store sales, as well as non-beverage products.
In the end, it is difficult to imagine that Starbucks can continue the growth it has seen in the past. Because of this, Starbucks is likely a good company to own, but not a great company. You will likely get consistency and respectable growth, but sometimes, this is exactly what we need.
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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.