The number of Starbucks coffee shops that flooded the market
during the mid-2000s was almost comical. In 2008, there were more
than 230 Starbucks stores in New York City, with over 180 just in
There were literally Starbuckses right across the street from
each other. As a coffee lover and Starbucks fanboy, I didn't
But rapid expansion and market saturation turned out to be an
unsustainable business model, which led to a large number of
underperforming stores. As a result, Starbucks brought back
former CEO Howard Schultz in 2008, and the company closed a
number of U.S. stores and ceased expansion efforts.
Yet half a decade later,
is back in full-blown growth mode.
Despite concerns that Starbucks might again be hitting a
saturation point, the coffee company is still very much a growth
story. Starbucks has a number of growth levers it can pull this
time around beyond just rapid store expansion. These include the
company's innovation on the food side and its single-serving
products, Verismo and Teavana.
With the likes of
, Tim Horton's and Dunkin' Donuts all fighting for a piece of the
market, the competition in the coffee market has increased over
the past half-decade -- but Starbucks continues to set itself
For a couple years there, it looked as though Starbucks and
its chief rival,
Dunkin' Brands (Nasdaq:
, were going to trade in lockstep forever. However, after
upgrading its fourth-quarter guidance and announcing its
partnership with Danone, Starbucks begin pulling away and appears
to be leaving Dunkin' in the dust.
As mentioned, Starbucks has a partnership with Danone in the
works for Evolution Fresh-branded Parfait Greek yogurt products.
The rollout is expected to debut in Starbucks stores next year
and in grocery stores in 2015.
New Paths To Growth
Innovation lies at the heart of Starbucks' growth story, and it
appears to be on the right track, with a focus on tea, food,
healthy offerings and at-home products. The tea business is large
and growing, estimated to be a $40 billion market. Starbucks
snatched up Teavana, a specialty retailer of tea that operates
mall-focused stores. The growth initiative here is to open tea
bars, serving customized tea beverages inside Teavana stores.
With the likes of
, Tim Horton's and Dunkin' Donuts all fighting for a
piece of the market, the competition in the coffee market
has increased over the past half-decade -- but Starbucks
continues to set itself apart.
In the Americas, Starbucks is still ramping up store growth.
But with Schultz at the helm, it's unlikely the company will push
expansion to the point of saturation as in 2008. And beyond that,
the true revenue growth will come from new products. Firstly, the
company is consistently introducing new food products, which now
accounts for over 30% of revenues, including adding bakery
products from La Boulange (acquired last year) to its stores.
Fiscal fourth-quarter results showed that operating earnings
per share (
) were up 37% year over year to $0.63, and revenue rose 13% on
the back of a 7% increase in same-store sales. The really good
news? All regions look to be in good shape, and thanks to the
effects of falling coffee prices, operating margin rose to
With only 35% of revenue coming from outside the U.S.,
Starbucks is setting its sights on international markets.
Starbucks has 500 stores in Latin America and plans to enter the
Colombian market in 2014. It also expects China to soon become
its second-largest market. The company expects to open about
1,500 stores next year: 600 in the Americas, 750 in Asia, and 150
in Europe, the Middle East and Africa.
Customer Captivity At Its Best
The company already has a cultlike following, and its Starbucks
loyalty program is only increasing its level of customer
captivity. Nearly 1 out of every 3 transactions at U.S. Starbucks
locations is made with a Starbucks card. What's more, about 10%
of its transactions are made with smartphones.
It's looking to increase its customer captivity even more by
expanding its loyalty program to include its channel development
segment, which houses all the non-Starbucks stores products and
sales. Starbucks plans to expand its loyalty program to include
the purchase of packaged coffee at grocery channels and to allow
the use of Starbucks cards at Teavana stores.
Starbucks has quickly built itself into the most recognizable
name in the coffee business and is ranked by Forbes magazine as
one of the world's most valuable brands. Let's not forget the
1.3% dividend yield and buyback program. Last quarter, Starbucks
raised its quarterly dividend nearly 25%, to $0.26 a share,
putting its payout ratio in line with its target of 40% to
Risks to Consider:
The biggest risk to Starbucks is weak economic conditions.
Its premium-priced products are easy to trade down from in a
tough operating environment. Helping protect on the downside is
the fact that many of Starbucks' consumers are less susceptible
to economic downturns. On the commodity side, a sharp rise in
coffee prices could strain Starbucks' margins.
Action to Take -->
Buy Starbucks for upside to $90. That's a multiple of about 28 on
its consensus EPS estimates for fiscal 2015. Its
price-to-earnings (P/E) ratio has ranged from 15 to 35 over the
past three years. Considering that analysts expect EPS to grow at
a compound annual growth rate of nearly 20% over the next five
years -- which compares favorably with an expected rate of less
than 13% for the specialty eateries industry -- it's easy to see
why Starbucks deserves to trade at the high end of that