Starbucks Brewing?

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The 1Q13 results (announced on Jan. 24) demonstrate the strength, resilience and increasing global business of the omnipresent, Seattle-based Starbucks (NASDAQ: SBUX). One should have this cup of coffee given its expansion plans and strong execution abilities.

Strong 1Q13 results:

  • 1Q13 sales increased with 6% comparable same-store-sales (SSS) growth driven by +4% in traffic and +2% in average ticket. Operating margins improved +50bps due to cost savings in EMEA segment (+110bps operating margins) and the benefit of lower coffee costs leading to +230bps in operating margin of the Channel Development business. This was partially offset by -50bps in the US segment mainly due to the impact of Superstorm Sandy and -60bps in the China-Asia Pacific region due to continued investment spending.
  • It continues to maintain a strong balance sheet with $1.9 billion cash balance and a modest debt balance of $549million.

 

Hot China:

  • China is being considered the go-to place by many retailers who are facing saturation in the domestic market. Currently, Starbucks has 713 company-operated stores and 2,706 licensed stores in its China/Asia Pacific region, and it aims to add another 600 stores in FY13. The growing importance of China is easily evident from the equal number of new store openings in China and the US. Although 75% of its revenues come from Americas, it is a number that will surely change given its massive expansion plans for the China-Asia Pacific region.
  • However, key risk is the future growth in the region. These incidents do not come with a warning as was clearly evident in the recent safety issues facing Yum! Brands resulting in a steep decline in revenues. However, these risks are inherent when a company focuses on international expansion. For Starbucks, this risk could be largely mitigated by its strong consumer loyalty, brand image and geographical diversity.

 

Selling a Strong Consumer Experience:

  • Starbucks continues to enjoy strong consumer support despite its high priced coffee. This can be mainly attributed to its understanding that convenience is a priority for any customer. It has 18,000 stores across 61 countries, and in some locations the company has gone as far as setting up stores on the opposite side of the same road.

 

Complementing Acquisitions:

  • Starbucks' two multi million acquisitions of La Boulange and Teavana are an ideal fit for the company. These along with its earlier acquisition of fresh juice maker Evolution Fresh will help to increase its foothold in America.
  • Through its recent acquisition of Teavana ($630 million in cash), it expects to capture a market share in the $40 billion tea market. For Starbucks the acquisition will complement its existing Tazo Brand, while Teavana will be able to expand its stores (currently 300) by leveraging Starbucks' real estate and design stores.

 

Shareholder-Friendly:

  • Starbucks continues to be shareholder-friendly with a dividend of $0.84 per share, 11.8 million share repurchases in FY12 and a further $25 million authorized program. It also has strong liquidity of $1.9 billion which more than sufficiently covers its $549 million debt.
  • Another long-term catalyst can be raising additional debt for its expansion plans. Given its lower debt levels, it can issue debt in the lower-interest market and invest the amount in the high-growth China-Asia Pacific region.

 

Competition:

  • Starbucks faces tremendous competition from McDonald's to Green Mountain Coffee Roasters (NASDAQ: GMCR) to mom-and-pop shops. However, Starbucks tops the list on consumer experience.
  • Green Mountain Coffee Roasters is expected to face margin pressures, given the increase in green coffee prices due to fungal disease (roya) outbreak in Central America and a possible rebound in Arabica-coffee prices. It recently provided a weak second quarter forecast with sales increasing 14-18%, below analyst expectations. Green Mountain Coffee Roasters' key product, K-Cups, may face increased competition due to the upcoming expiration of patents. While it continues to be a leader in the market, ahead of Starbucks' Verismo brewer, competition may intensify in the medium term.
  • Another key competitor is Dunkin' Brands (NASDAQ: DNKN). Although it has higher debt levels ($1.9 billion, with a total debt to asset ratio of 57.7% vs. Starbucks' $549 million and 6.7%), one can argue the merits of its franchise expansion structure, wherein the individual owner of the store takes up the entire cost of the store. The company is also aggressively expanding in international locations and has recently entered into a franchise agreement with Vietnam Food and Beverage to assist in building the brand in Vietnam.

 

Conclusion

While Starbucks and Dunkin' both have aggressive expansion plans and are trading at attractive multiples, key risk with respect to product concentration and unprecedented events in new international regions remains. In my opinion, Starbucks would definitely be preferable given its international expansion plans, robust growth, share repurchases, cost management practices, strong liquidity and last but not the least its instantly recognizable mermaid logo.


StockRiters.com has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure