America has a history of exporting its brands overseas. From iconic brands such as Coke (KO), Google (GOOG), and Apple (AAPL), this nation has left an indelible mark in the consumer sector. As we write this, another brand is making that same journey.
Starbucks (SBUX) has become a permanent fixture in the United States. Few people can begin their working days without a drink from Starbucks. While coffee aficionados may debate the quality of Starbucks' product, or its effect on the "coffee experience", it is undeniable that Starbucks has been wildly successful. And the stock chart backs this fact. Since its IPO in July 1992, Starbucks has advanced over 5,400%, compared to the S&P 500's 186% advance.
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We think that this outperformance will continue due to the tremendous growth opportunities that lie ahead of Starbucks, not only internationally, but here in the U.S. as well. After years of over-expansion, Starbucks has greatly slowed new store openings in the U.S. and has instead focused on improving both the quality and profitability of its existing U.S. operations. There will be only 200 new stores opened in the U.S. during the 2012 fiscal year, compared to 600 overseas.
During Starbucks' record third quarter results, Troy Alstead, the CFO commented that:
"with our global store portfolio performing at record levels and momentum building in CPG [Consumer Products Group,] we have a solid foundation in place to pursue continued profitable growth in fiscal 2012 and beyond...we expect to drive growth in earnings per share in fiscal 2012 in the range of 15 to 20 percent."
Starbucks has been building momentum across all its channels and categories, with same store sales rising 8% in the third quarter, and tickets rising by 2%.
Starbucks is well positioned on all fronts to post even more records down the line. 1,500 stores are scheduled to open in China by 2015, and the company will enter the Indian market in 2012. The Consumer Products Group has also been greatly successful. VIA Instant Coffee is now available in over 70,000 retail locations, and the company has proved that people are willing to spend money to have Starbucks coffee with them wherever they may be.
Critics may wonder how this can be with the U.S. and global economy in jeopardy. They may ask how people can afford to spend more on Starbucks coffee when they can buy it elsewhere for less. The truth is that after 40 years, Starbucks has turned itself into a consumer staple, not a consumer discretionary product. On the conference call, CFO Troy Alstead said:
"this quarter marked the first time that average daily transactions per store eclipsed our 2006 levels, previously the highest year on record. This achievement speaks to the incredible health of our U.S. business and to the improvement in our operations, when you consider that we're servicing this increased volume while holding customer satisfaction at consistently high levels."
Despite the seeming peril the U.S. economy is in, Starbucks is doing more business than ever before, a testament to its unique place in the market. VIA Instant Coffee sales grew by 41% in June, according to Jeff Hansberry, President of the Consumer Products Group. We are confident that this growth will continue. Starbucks management is also confident in its future, which is why it has raised guidance for the fiscal year. EPS should now be at $1.50-$1.51, and margin guidance has also been raised, with the Consumer Products Group margin expected to be at the high end of the 25-30% range, while store margins are expected to improve by 150-200 basis points, with the bias being towards the high end of that range.
Starbucks has nearly $2 billion in net cash on the balance sheet. Starbucks initiated a dividend in 2010 and boosted it after only one quarter, reflecting the strong cash flow and business prospects of the company. The dividend is currently 13 cents per share, for a yield of 1.4%, and we think Starbucks has plenty of room to not only raise the dividend, but also invest in its future growth.
We think Starbucks is a great stock to invest in. Its customers are fiercely loyal in the U.S., and its opportunities in international markets are huge. Analysts agree, with Argus expecting the stock to reach $48. S&P sees the stock at $44, and Credit Suisse sees the stock at $48.The Reuters average price target is $44.60, which would represent nearly 20% upside. Starbucks is well positioned for the future, and we think now is a good time to invest in it. Starbucks has delighted investors and customers for years, and we see no signs of an end to that trend.
Disclosure: I am long SBUX.