Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

Starbucks (NASDAQ:SBUX) reported record second quarter results on Thursday afternoon. Earnings came at $279.1 million or 36 cents per share, on revenue of $2.93 billion, comfortably beating analyst estimates on both the bottom and top lines. The company boosted its guidance for the current quarter.

Starbucks has been riding the baby boomer trend in the 1990s that created the need for a “third place,” an “affordable luxury” where people could share and enjoy a cup of coffee with friends and colleagues, away from work and home. The chain has inserted itself into the American urban landscape more quickly and craftily than any retail company in history, and has forever changed the way Western companies market themselves to consumers.

Reflecting this success, Starbucks stock has been a highflier, gaining 60 percent in the last year alone, compared to a 30 percent gain of its closest competitor, McDonald's (NYSE:MCD). The company is further beating McDonalds on economic fundamentals. We think that the stock is still a buy, for five reasons:

Starbucks versus McDonald’s Financial Performance Statistics in 2011

Starbucks

McDonald’s

Dividend

1.30%

2.8%

Operating Margins

39.01

15.29

Qtrly Earnings Growth (yoy):

67

35.60

Qtrly Revenue Growth (yoy):

16.40

4.10

  1. Right market segmentation. The company has stayed with the upper-scale of the coffee market, competing on comfort rather than convenience, as is the case with its closest competitors, McDonalds and Dunkin Donuts (NASDAQ:DNKN).
  2. Execution. The company continues to focus on its original product bundle that includes good coffee, quality services, and a nice environment to hang around.
  3. A superb leadership. Starbucks is led by company founder Howard Schultz, who continues to come up with innovative products to expand the companys product portfolio.
  4. China expansion. As is the case with Japanese people, Chinese people live as extended families in small houses. This means that there is a strong demand for Starbucks third place.
  5. Borders liquidation. Starbucks is expected to benefit from the closing of Borders stores.

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

Source: 5 Reasons to Invest in Starbucks