Starbucks: The Brewing Stock

| About: Starbucks Corporation (SBUX)

Starbucks Inc. (NASDAQ:SBUX) has brought forth its first quarter results of the current fiscal year 2014, which was a tempting treat for all its investors. The company reported a consolidated net revenue of $4.2 billion, a steady increase by 12%. On an individual share basis, the earnings per share stood at $0.71 per share and this had increased by 25%. It set afloat 417 net stores globally - that totaled the store count to 20,184 - including the 4,000th store in CAP and the 2,000th store in EMEA.

The steady and substantial Q1 results demonstrated the fundamental strength of its business, particularly noteworthy given the fact that it saw continued economic challenges worldwide. Starbucks sustained furthermore to explore unique ways to connect with its prospective as well as existing customers. The first Starbucks store on-board a train, launched in November 2013 in partnership with Swiss Federal Railways (SBB) in Switzerland, is one such example. Another grand launch took place at Monaco in partnership with Tar.Ca during early December of 2013 to offer its aromatic coffee. Both received an overwhelming response from the local people.

Starbucks now operates in a total of 63 countries, earmarking its overall presence on the global forum. The company opened its second Teavana Fine Teas & Tea Bar in early December, bringing the elevated Tea Bar experience to Seattle's University Village following the October opening of the first of this concept in New York City.

The Financial Review

The ace-performing segment was the Asia-Pacific region that portrayed an equal increase of 25% in total revenue generation, compared to that of the Q1 of the fiscal year 2013 as compared to the American and EMEA segments, as described below.

China/Asia Pacific Segment Results

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Net revenues for the China/Asia Pacific segment were $266.9 million, which was driven by incremental revenues from 672 net new store openings over the past 12 months. An 8% increase in comparable store sales also contributed to the net revenue growth.

American Segment Results

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Net revenues for the American segment stood at $3.1 billion in Q1 of FY14, clearly indicating an increase of 8% over Q1 of FY13. This increase was elicited by a 5% increase in comparable store sales and incremental revenues from 735 net new store openings over the past 12 months.

EMEA Segment Results

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While the net revenue for the EMEA segment was $339.5 million in Q1 of FY14, an increase of 11% over Q1 of FY13. The increase was primarily due to incremental revenues from 157 net new store openings over the past 12 months and a 5% increase in comparable store sales.

The company has reaffirmed and updated its fiscal year 2014 targets. Revenue growth is expected to be 10% or greater. The company is about to open approximately 1,500 net new stores, nearly 600 in America, 150 in EMEA and approximately 750 in China and Asia Pacific

However, the rapid expansion in China and Asia Pacific may not be seen completely as a positive sign. China and Asia as a whole could very well be a huge growth market for Starbucks, but expanding too rapidly could cannibalize profits and increase operational risks. Overpricing in some of its products has been observed of late, as Starbucks charges nearly 50% extra in China than it does in the US and the UK.

Plan of Expansion & Strategic Alliances

For its future advancement, the company aspires to contemplate upon new as well as expansion of existing products, beyond its forte of coffee. The company is devising strategies to expand its presence in the baked foods sector under the aegis of the brand "La Boulange". The instantaneous boom of La Boulange bakery products has propelled the company to double its number of stores by the end of fiscal 2014. The company has initiated investigation upon new La Boulange lunch concepts in many stores based in San Francisco alone.

A year down the lane after the acquisition of Teavana, a company that offers tea beverages, Starbucks has perceived adept insight on the prevailing scenario of the tea beverage market and tea drinkers to propagate its very own tea bar. This designated its confirmed entry in the global tea beverage market, which represents a $90 billion global market opportunity.

In the month of October 2013, it added another feather in its cap with its unique concept of tea bars in the New York city, serving a premium range of assorted tea drinks, and plans furthermore to expand its reach in the existing scenario. Inspired largely by the triumphant success of its alliance with Apple Inc. that aided the customers to browse over the wireless network and make instantaneous searches, previews, purchase and/or download music from the iTunes Wi-Fi Music Store at Starbucks onto their iPod touch, iPhone, PC or Mac whilst at a participating store, Starbucks has recently kicked off a brand new store in Texas dedicated to the Austin City Limits Live, the longest running music television programme, filmed under the bright lights of the historic Moody Theater. The warm and inviting space captures the city's local history, artistic passion and whimsical spirit and can be quoted as a recent example of the company's dedication to meet customer demand with most precision.

The company has also joined hands with Square, Inc. to facilitate the service of mobile payment to its customers, thus, eyeing the mobile and e-payment facilities, which have become one of the most alluring reasons in fetching novel customers.

A Peer Review Of The Industry

The industry's rising demand for premium coffee and snack products is mainly driven by a number of factors that includes disposable income, a stringent attitude towards healthy lifestyle, per capita coffee consumption, world pricing of coffee and its demographics. This industry is highly sensitive and fragile to the macroeconomic factors that disturb the growth scenario in household disposable incomes. Largely the slump in recession, a steep decline in household disposable income and, consequently, an upsurge in unemployment and stagnant wages led dramatically towards a downward pressure on the revenue and profitability margins in the industry. Another crucial factor for analyzing the demand in the industry is the per capita coffee consumption, where the increase in coffee consumption elevated the revenue upswing in coffee & snack shops. The main reason behind this rise in consumption would be attributed to the accretion in disposable income, as the economy further revamps and consumers begin to relax their budgets eventually. This turns out to be a positive move from the existent market revenue scenario. The coffee consumption is expected to maximize furthermore in 2014.

As coffee beans are the primary input in the value chain of the industry participants, their prevailing volatile prices determine the market cost and profitability margins. The world price of coffee has skyrocketed in recent years due to the growing demand in other countries and the resultant shortage in supply. A forecast uptil 2018 states that coffee bean prices are projected to see a gradual decline that will likely lower the market costs and increase the profitability output.

Market Trend Analysis

Starbucks' profit and its stock price movement has been on a constant soar, over 1100% for the last five years. We do infer that the stocks are surmounting from a historic low value of 68.97%, and with an allocated target price of $88, the prices will certainly escalate furthermore in the upcoming years.

Click to enlargeFigure: Movement in share price of Starbucks in the past 3 months (Source: REUTERS)

Starbucks is currently trading at about $73 a share with expected EPS in the range of $2.59 to $2.67 next year, with a forward P/E ratio of 27.59 and expected P/S ratio of 3.39, which is nearly comparable to the industry average.

There are a few things that may be of grave concern to the investors. For instance, the increase of 1100% price was not backed up by equivalent growth in revenues. As compared to the November 2006 price, 80% reduction is clearly observed in November 2008. A similar drop appears unlikely, but chances of corrections are always there. Also, increased profits have become more difficult to generate with the rise in coffee commodity prices, which could be very detrimental over the next few years.

Beta value of 0.85 suggests that the stock prices are less volatile compared to the market and it has potential of good returns. The industry is burgeoning at a fast pace and the company is absolutely accomplishing the best out of the best by banking upon its blueprint to innovate and diversify into simultaneous gimmicks of instant snack business. And the ultimate rule of the game of stock market remains that there are no returns without any risk. Hence, procuring stocks of Starbucks based upon the current position will definitely be a perfect strategy for a judicious investment owing largely to the prevailing market sentiments.

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

Business relationship disclosure: The article has been written by Analysts at EurEx Consulting. EurEx Consulting is not receiving compensation for it (other than from Seeking Alpha). EurEx Consulting has no business relationship with any company whose stock is mentioned in this article.