Buying Starbucks On The 2016 Pullback (Part 2)

| About: Starbucks Corporation (SBUX)

Summary

Starbucks has been on a significant pullback with shares down by about 9% since the start of the year.

Over the last decade, management has used acquisitions to expand the company’s product line, diversify revenue streams, and create growth.

18% year-on-year increase in food revenue during the lunch day part.

Food sales represented more than 20% of revenue in the U.S.

Earlier this month I wrote an article arguing that you should be buying Starbucks on its 2016 pullback. Shares of Starbucks (NASDAQ:SBUX) are down by about 9% this year, dramatically underperforming the index. In the article, I argued that Starbucks is an attractive long term buy due in part to the company's investments in technology and tea.

Since my last article, I've started rebuilding my long position in Starbucks. After hitting submit on my last article, I realized that I didn't fully outline my thesis. So, over the next few weeks I will be releasing three additional articles fully outlining my long thesis. Here is the first of those.

Successful Acquisitions

In recent history, Starbucks has the been the best acquirer in the quick serve restaurant industry.

It isn't easy to find potential acquisition targets in the quick serve restaurant industry. It is harder to execute those acquisitions. And, it is even harder to integrate those acquisitions into the brand and supply chain.

In 1999, Starbucks made its first major acquisition with the purchase of Tazo for $8.1 million. Since then, Starbucks has been on a buying spree with the acquisition of now known brands such as Seattle Coffee Company (2003), Ethos Water (2005), Coffee Equipment Company aka Clover (2008), Evolution Fresh (2011), Teavana (2012),and LaBoulange (2012).

Starbucks is no longer just a coffee company. Today, Starbucks is a coffee, tea, pastry, lunch, water, juice, and more company. Over the last decade, management has used acquisitions to expand the company's product line, diversify revenue streams, and create growth.

As I mentioned in my last article, the company's tea business in particular had its strongest quarter in over a year, up 17% year-on-year and contributing one point of comp, fueled by an accelerating sales of Teavana handcrafted tea beverages in Starbucks retail stores.

Excluding Teavana, LaBoulange is my favorite acquisition. At first, I was a little skeptical in my article Goodbye My Iced Lemon Pound Cake writing:

I feel Starbucks has moved a little too fast with the roll out of its La Boulange menu offerings. As the title would suggest, I can't find a single iced lemon pound cake in my area. While I understand the company wants to leverage its La Boulange brand, it shouldn't forget about the array of successful menu offerings it created in the years leading up to the acquisition.

Starbucks purchased LaBoulange as a way to expand its menu and to offer healthier menu items. Overnight, Starbucks removed almost all of the previous menu items and replaced them with LaBoulange alternatives. But over the next year, Starbucks returned many of its original items including my iced lemon pound cake. Management learned from its mistakes and didn't look back.

From there, Starbucks used LaBoulange as a tool to build new menu items including many non-breakfast items.

My third favorite acquisition, Evolution Fresh, pushed Starbucks into the ready-to-drink industry. Today, you can't find a Starbucks location or grocery store that doesn't carry Evolution Fresh juices.

The acquisitions of LaBoulange and Evolution Fresh are perfect examples of post-acquisition integration. Both companies were complementary to Starbucks menu and brand.

Starbucks stream of acquisitions has sustained growth, diversified revenue, and made Starbucks an everyday, all day, treat. Over the long term, you can bet that Starbucks will continue to look for, and grow through, acquisitions.

Menu Diversity

When is the last time you went to Starbucks?

Odds are, your last trip to Starbucks wasn't in the morning. Starbucks is no longer a morning-dependent company. These days, I find myself going to Starbucks for breakfast, lunch, dinner, and even for a drink after work.

Successful acquisitions has turned Starbucks into an all day business. On your next trip to Starbucks look at the menu and shelf space. These days, over 75% of the menu and items are targeted at non-breakfast visitors.

Kevin Johnson, President & Chief Operating Officer & Director, commented on the company's lunch offerings on the last conference call:

Our innovative new lineup of lunch offerings delivered an 18% year-on-year increase in food revenue during the lunch daypart. And we continue to test and learn as we shape our evenings program. For the first time ever, food represented more than 20% of revenue in the U.S. Our Americas segment had an outstanding Q2.

Incredible. By adding high quality menu items, Starbucks has increased average ticket sales and the number of visitors in its stores. Last quarter, Starbucks reported record financial and operating performance, including record revenues, record profits, a 7% increase in comp store sales in the U.S., and a 6% increase in comp store sales globally.

Successful acquisitions and menu diversity go hand in hand. And, when done correctly the results are powerful.

Disclosure: I am/we are long SBUX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.