) bought a bakery last week by spending money more than it ever
has on an acquisition. And for a brief moment, the unthinkable
happened: investors sold the shares on worries that CEO Howard
Schultz had made a mistake.
It didn't last long. Everyone quickly remembered how happy
Starbucks shares made people over the years and brought the price
back. With the shares up more than 250% in the past three years,
Schultz can run a bakery if he wants.
Starbucks has bought a lot of benefit of the doubt with that
share price performance. That trust probably will work out fine
for everyone involved if the economic recovery continues even at
the snail's pace of last year. But if you're worried, like many
are, that the
rate might be worse than it looks; that the burst of consumerism
in China is unsustainable now; or that Europeans will soon find
the 5 Euro coffee drink a bit much, Schultz's latest diversions
are worth a look. Especially if you remember what happened to
Starbucks shares in the last economic recession.
Starbucks has spent money in several unexpected ways recently.
While investors knew that the company wanted better food in its
coffee shops, many expected a partnership to create a proprietary
food brand rather than the $100 million acquisition of Bay Bread
LLC and its 17 La Boulange bakeries. Two days later, while
analysts were still mulling whether Starbucks paid too much for
that, the company announced an agreement to sell discounted cups
of joe through hundreds of Coinstar (
) vending machines. That's a move that may or may not: a) cheapen
the brand, or b) eat into store sales. Last year, Starbucks
bought juice company Evolution Fresh and announced plans to open
a whole new chain of stand-alone juice and sandwich shops.
The deals have their pros and cons, but their biggest threat
generally is the potential distraction just as the going gets
tougher. The great recession that pushed Starbucks toward penny
stock territory four years ago led to massive cost cutting and a
renewed focus on Starbucks' core customers. The overhaul made the
share price what it is today, but the underlying gains from those
changes appear to have gone as far as they can.
SBUX Operating Margin TTM
Future share price growth lies - as does the success of 1,000
new stores this fiscal year -- in bigger sales at the 17,000-plus
existing stores. Almost all of those new stores are in places
where economic recovery is wallowing (400 in the Americas, for
example) or where growth rates are decelerating quickly. (200-ish
in China). Some of those new stores will be in the depressed
economies of Europe, too, but the company lumps those numbers in
with the Middle East and other regions.
The company intends for the bakery and juice acquisitions to
help with the second objective by giving fast food seekers more
wholesome offerings than competitors McDonalds (
) and Dunkin' Donuts (
). Both Bay Bread and Evolution Fresh are brands that consumers
pay up for in upscale groceries like Whole Foods Market (
). But the Coinstar partnership's fit into this philosophy is a
bit of a head scratcher. Coinstar kiosks set up in, say, a
) or Walgreens (
), will stream out a cup of Starbucks' Seattle's Best brand
coffee for a buck. Perhaps it's a hedge against a time when $1.50
for a barista and a cup is too expensive.
At 31 times earnings and more than three times sales,
Starbucks shares are among the most expensive in the food
sectors. This isn't anything new and probably shouldn't be the
biggest concern of today's investors. YCharts Pro gives the
company very strong marks for fundamentals and an average score
for share price value.
If this moment in time turns out to be a temporary detour on
the way to international economic recovery, Schultz' timing on
these new ventures couldn't be better. More likely though, this
is a recovery that will make Starbucks cafes new and old work
very hard to match the successes of recent years. Now they need
to do that while learning to run bakeries; rolling out new juice
shops; managing two grocery distribution businesses; and selling
kiosk coffee. Let's hope Schultz doesn't have to write another
book about returning the company to its roots.
Dee Gill is an editor for the
YCharts Pro Investor Service
which includes professional