We were closing in towards the end of 2008, and George W. Bush was still in his office. The Great Recession was already setting in and Starbucks (NasdaqGS: SBUX) was falling apart.
Since November 2006, the company's stock price fell down from as high as $40.01 to as low as $7.5 by the end of 2008. It dropped even further after the release of the disastrous fourth quarter result of FY08. Net income that quarter was $5.4 million, compared to $158.5 million for the same quarter year ago.
The FY08 annual report wasn't very promising either. Net earnings totaled $315.5 million for fiscal 2008, versus $672.6 million in fiscal 2007, while EPS for the year was $0.43, compared to EPS of $0.87 in fiscal 2007. The main cause of crashing bottom-line of the company was due to heavy reconstruction charges and transformation overheads. The company was about to close around 600 stores further that year. Panic set in among investors, and it was hard to decide whether this fall was due to senseless company saturation, insensitive commoditization and management mayhem. Many thought that it might be the end of the rule of Starbucks, and the hype should wear off soon. In fact, the satirical newspaper, The Onion, once jested that a new Starbucks was opened inside the restroom of an existing Starbucks. It was almost everywhere, and it didn't really have any space further to expand, rather to shrink back. But...did it shrink back? No, it did not.
We were assured of that in the FY11 report. The total revenues shot to $11.7 billion, compared to $10.7 billion in 2010. In fact, net revenues was up by 6.3% in United States alone, not to mention that the company's sales grew by 14.7% in the international circuit. The highest amount of growth was in the global CPG and food service segment. But as any good businessperson will say, revenues aren't enough. What about the operating margin? Operating income increased to $1.73 billion, up from $1.42 billion in 2010. Clearly, the company has been restructuring and transforming for a reason. And there's no stopping it since then.
While the recently-introduced mobile payment system recorded over 26 million transactions, the company recently entered five new Chinese cities, namely, Langfang (Hebei Province), Zhengzhou (provincial capital of Henan Province), Harbin (provincial capital of Heilongjiang Province), Xiangtan (Hunan Province) and Zhoushan (Zhejiang Province), even after crossing the 500 stores mark in China. Leave alone US, Starbucks is all set to conquer the whole world.
And here's food for thought. The people who bought Starbucks stock in the down-market in 2008, have achieved 50-bagger returns on their investment. Wow!
Moreover, this is why I would favor Starbucks even more. Dunkin' Brands (NasdaqGS: DNKN) doesn't have even one-tenth of the market cap and revenue of Starbucks. McDonald's (NYSE: MCD) McCafe might be good ready-made fix, but when you think of coffee, you think of Starbucks. And nonetheless, Caribou Coffee (NasdaqGS: CBOU) and Peet's (NasdaqGS: PEET) Coffee & Tea, the closest relative of Starbucks, are still too young and small in stature, even smaller than Dunkin' Brands, to compete with the Coffee Giant.
Have you been doubting Starbucks? Time to rethink!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.