In a recently released regulatory filing, Square Inc. stated that its payment-processing partnership with Starbucks CorporationSBUX led to significant losses.
The payment-processing company plans to go public and filed a regulatory filing with the Securities and Exchange Commission (SEC) on Oct14.
In 2012, Square entered into an agreement with the world's largest coffee chain to process debit and credit card payments. Per the SEC filing, the agreement was amended in Aug 2015 to do away with the exclusivity provision as Square anticipated that Starbucks will shift to another payment processor. Starbucks' own mobile payment app has gained tremendous popularity of late.
Square is sceptical that the deal, set to expire in the third quarter of 2016, may be called off earlier by Starbucks. The San Francisco-based company, on its part, does not plan to renew the deal as it incurred a gross loss of around $70 million between 2012 and the first half of 2015 due to it.
It is quite clear that Starbucks was one of the largest single users of Square's services. Starbucks' transaction revenues accounted for 14% of the payment processor's total revenue in 2014.
The deal, without a doubt, allowed Square to build a name for itself in the crowded retail space. Nevertheless, the unprofitable deal shows that the company cannot base its success on deals with large chains with tremendous negotiating power which may hurt its margins.
Starbucks has a Zacks Rank #2 (Buy). Investors interested in the restaurant sector may consider stocks like Bob Evans Farms, Inc. BOBE , Carrols Restaurant Group, Inc. TAST and Dave & Buster's Entertainment, Inc. PLAY . All three stocks sport a Zacks Rank #1 (Strong Buy).