Starbucks: A Healthier Menu And Testing Long-Term Resistance

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 |  About: Starbucks Corporation (SBUX), Includes: DNKN, GMCR, MCD, PNRA
by: Stock Traders Daily

By Neal Rau

Starbucks (SBUX) is doing their best to attract a more health conscious consumer, but the stock has already run, it is at resistance, and that causes investors some concern. In recent months, SBUX has introduced a range of healthier menu items, including salad bowls with flavors such as zesty chicken and black bean. The newer menu offers healthier choices that would appeal to their customers who might order a "skinny latte" for example. Food represents approximately 19% of Starbucks' revenue, and contributes 2% of the 9% U.S. comp growth. Over time, the entire U.S. system will have the new food platform, and the long-term target is to generate up to 30% of Starbucks sales from food.

The stock has made a big run this year, up over 34% YTD and up over 360% in the last 5 years. If investors see any potential weakness, they are going to be looking to take profits. We have SBUX strong near-term, but the stock is in play because it is testing long-term resistance; if resistance holds the stock could reverse all the way to longer term support.

One particular healthy new food item that stands out is Greek yogurt, which they will be offering in stores as early as spring 2014. SBUX announced plans to strategically align with French yogurt maker Danone and create yogurt products labeled with the Starbucks-owned Evolution Fresh brand. Yogurt is the nation's fastest-growing snack food, a $6 billion business. Sales of all yogurts in the U.S. increased 6.1% to $6.3 billion in the 52 weeks ended June 8, 2013; however, sales of the Greek-style yogurt surged 48% to $2.65 billion during the same period. The Starbucks / Danone yogurt products will be sold under the Evolution Fresh name. The first product will be a ready-to-eat Greek yogurt parfait to replace a Greek yogurt with honey parfait currently sold in Starbucks stores.

Starbucks is faced with serious competition from big companies like Dunkin Brands Group Inc. (DNKN), McDonald's Corporation (MCD) and Green Mountain Coffee Roasters Inc. (GMCR). During the last recession, MCD hurt SBUX by offering a lower priced coffee alternative with McCafe. Now with the recovery in the economy, SBUX is offering new food items that will appeal to their more health conscious adult customer, who might not mind spending a few dollars more for a healthy snack. Greek yogurt is widely considered a healthier snack and you see it everywhere now in the yogurt section of grocery stores. It is probably more of an adult snack but that would appeal to the SBUX type of customer.

As a health conscious SBUX customer, I rarely order food because the healthy food choices are so limited. It does not make sense to sacrifice taste by ordering a mocha-light and then adding muffin with 400+ calories. I might be tempted to eat a Greek yogurt or salad though. In Hawaii where people are very health conscious, half the drink orders I hear the barista's calling out are of the skinny variety. Restaurants like Panera Bread Co. (PNRA) have been very successful in appealing to the health conscious consumer. SBUX already has those customers in their store but until now, they have not offered food items that make sense. Who knows, you might be ordering a combo meal at SBUX like a healthy salad, Greek yogurt and mocha-light sometime soon. The stock has a lot of momentum right now and other catalysts for more growth like the Asian markets. The opening up of 523 stores in the China in the last 12 months has helped Starbucks increase its revenue by as much as 29% from the Chinese market. However, after such a big run in the stock investors should keep a close eye resistance levels. A reversal to long-term support might even bring a buying opportunity.

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

Business relationship disclosure: By Neal Rau for Stock Traders Daily and neither receives compensation from the publically traded companies mentioned in this article for writing this article.