Starbucks Is A Buy

| About: Starbucks Corporation (SBUX)

Starbucks (NASDAQ:SBUX) has demonstrated continued success over the years. The customers at Starbucks are very loyal and this loyalty is likely to be maintained in the foreign markets as well. Starbucks is the kind of company a long-term investor should own because it has a good, stable business model. In addition, it also understands it must stick to that business model, and has good financials along with very good management.

Some factors that make Starbucks an excellent choice for the Long term:

1. Business Model

Starbucks is a high quality coffee retailer that does business in 60 countries. It has gained its market share because of its urbane ambiance, good interior decor, good quality coffee products and its superior work culture.

Starbucks has put a lot of effort into maintaining its image. For instance, it is very particular about the ingredients for its products, such as the high-quality whole bean Arabica coffee beans, while its competitors, McDonald's (NYSE:MCD) and Dunkin' Brands (NASDAQ:DNKN) use Arabica and Robusta to control costs. Arabica has a smoother flavor, thus giving Starbucks a better product.

Starbucks generously offers its employees (even those who work 20 hours a week) stock options as well as health benefits. It was listed in Fortune Magazine's Top 100 companies to work for in 2013. Starbucks subscribes to the notion that if you treat your employees well, they will treat the customers well.

Starbucks' ambiance is one of the biggest reasons for its appeal. Customers go to Starbucks for more than coffee, they go for the experience. A customer at Starbucks knows what to expect before stepping through the door. "A rich warm color scheme, alternative music, organic-looking art, and baristas in green aprons," is how an article on Forbes describes it.

For the reasons above and many more, Starbucks enjoys abundant loyalty and assurance from its customers. Its wonderful business model should continue to make Starbucks a leading company amongst coffee retailers.

2. Competitors

Competing coffee shops have had little influence on Starbucks' growth and market share. Competitors have not affected the sales at Starbucks despite low prices and heavy marketing of their brands.

Some of the competitors of Starbucks in the U.S. are Dunkin' Donuts, McDonald's, Tim Hortons, Peet's Coffee and The Coffee Bean & Tea Leaf. As noted in the previous section, Starbucks offers better quality coffee than do many of its competitors.

It has also been noted that customers continue to visit Starbucks despite price increases at the shop, while prices fall concurrently at its competitors' shops.

Based on past trends, it seems unlikely that Starbucks' market position would be impacted by any ploys by its competitors.

3. Management

Howard Schultz, the CEO of Starbucks set up the first Starbucks cafe 30 years ago. He's been the face of the company all this time, and has been credited for the company's instrumental growth.

As long as Howard Schultz is with the company, the company should be expected to stay on course with its current formula for keeping customers hooked.

4. Cash Reserves

The company is in a relatively good financial situation, with some exceptions. The company could consider increasing its cash reserves considering the possibility of food inflation. However, this is not a major worry since its Morningstar Credit Rating is 'A-", and it might not find it too difficult to borrow money in a crisis.

At the end of 2012, the company's current assets were $4,199 million, while the current liabilities were $2,209. That gives the company a Current Ratio of almost 2. Even though, this is not a weak figure, long-term investors like companies that give themselves excess cash cushion, lest an economic crisis hurt the company's ability to survive.

Thankfully, the debt at the company is manageable at $3,104 million, while the Equity is $8,219 million, giving the company a comfortable Debt-to-Equity ratio of .37.

The company could increase its cash reserves, since that is unlikely to affect its business model. It would instead help inspire confidence in the company's survival in the long term.

4. Stock Price

Its PE ratio of 31.91 seems a bit high if one is looking for a discount purchase. However, for long-term investors, the good fundamentals at the company make up for the high price.

A long-term investor looking for consistent returns for the next 30 years should be more focused on survival than high returns.


Considering its reliable business model, excellent management, lack of real competition, good financials and a moderately-priced stock, Starbucks seems a "BUY" for long-term investors. There are very few companies in the world that one can be sure of the success of, but Starbucks is one of them. The key trigger for making Starbucks unattractive as a long-term investment would have to be a change in its business model, where it abandons the traits that have delivered it solid loyalty from its customers. But, such an event seems unlikely for now.

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

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