Expresso Machines and Pumpkin Lattes Boost this Coffee Seller
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Starbucks (NASDAQ: SBUX) made the headlines on Thursday with another blow to beleaguered Green Mountain (NASDAQ: GMCR), as Starbucks announced that its anticipated home expresso machine was finally here. Home coffee makers aren't the only thing that could help out Starbucks going forward. Starbucks' fall seasonal menu brought its regular customers back, and the coffee shop also tested out some new strategies recently. After recovering from a sharp selloff in early August, Starbucks looks like it's back on track.
Starbucks might have some room to expand without challenging Green Mountain directly. The Fool's Michael Lewis explained that the Green Mountain CEO described Starbucks' Verismo machine as an expresso maker, arguing that Starbucks' machine served customers with different tastes than Green Mountain's customers. Starbucks' announcement still sent Green Mountain's stock down 9.6% on Thursday. 35% of Green Mountain's float is short right now, as many investors think that if Starbucks does go after Green Mountain's market, Starbucks will win.
Starbucks' pumpkin spice lattes will only be here for a few months, but they could still bring in lots of sales. Seeking Alpha posted a Starbucks earnings call transcript which explained that pumpkin latte sales were up 44% for the quarter, helping Starbucks' 4Q 2011 revenue rise by 15%. Pumpkin lattes arrive at Starbucks every year, and this trend seems like it's picking up more speed this year, as Jane Wells at CNBC reported. I noticed lots of people on Facebook talking about these pumpkin spice lattes, so this campaign made Starbucks' well known brand even more visible.
Starbucks' competitors also want in on this seasonal trend. Dunkin' Donuts (NASDAQ: DNKN) offers pumpkin donuts, and Einstein Noah (NASDAQ: BAGL) now sells pumpkin bagels, reported Bret Thorn at National Restaurant News. Panera (NASDAQ: PNRA) offers its own take on the pumpkin latte, as well as pumpkin pie bagels. Panera's pumpkin spice lattes have also been out for a few years, but Starbucks' pumpkin spice lattes seem to be getting more attention.
Starbucks also revamped its rewards program, although angry customers complained about these changes on Starbucks' blog. A Starbucks customer can now receive a drink reward after fewer purchases, and the program now offers food rewards, but the loyalty program doesn't offer free syrup or soy milk anymore. This change might not produce the results Starbucks expected, but it does show that Starbucks is testing out new ideas in its loyalty program, which could help Starbucks compete with Panera. Panera has a unique rewards program that brings up cookbooks, event invitations, and menu previews instead of a more standard buy 12, get 1 free offer.
Remember Jared's Subway ads? Samantha Bonar, at LA Weekly, reported that a Starbucks customer dropped 85 pounds on a Starbucks diet. Although Starbucks' other customers probably won't become this loyal, this news does highlight Starbucks' health food offerings, which are also one of Panera's strengths. Kerri-Ann Jennings, at Eating Well, reports that Starbucks, Panera, and Dunkin' Donuts all sell low calorie breakfast sandwiches, but higher calorie sandwiches show up on these chains' menus as well. Einstein Noah can also provide a high or low calorie meal, depending on the toppings on the bagel.
Starbucks' marketing strategies do seem like they've helped its bottom line, but Starbucks isn't the cheapest coffee shop stock around. Starbucks' 1.48 PEG is higher than Einstein Noah's 1.24 ratio and Dunkin' Donuts' 1.39 ratio, while Panera's 1.56 figure is slightly larger. Starbucks also pays dividends and Panera doesn't, although Einstein Noah's 2.8% yield beats Starbucks for investors who want dividends. Starbucks' 10.7% profit margin is a major plus, which helps explain how Starbucks can build coffee shops around the world and pay out dividends while keeping its leverage low. With $2.5 billion in cash, Starbucks' $550 million debt isn't a problem.
Starbucks' brand power makes the strongest argument for me. When I heard people talk about pumpkin themed food recently, Starbucks was the name that came up. Investors who don't want to go by anecdotal evidence may be convinced by Starbucks' profit margin and balance sheet. Starbucks' popup store test and loyalty program revamp show that this coffee shop still has new ideas. Starbucks' post selloff rally shows that other investors also see the chain's future potential, and Starbucks looks like a solid pick to me.
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With Green Mountain as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling, or the perfect entry point for an enormous rebound. You can find a recommendation for how to approach investing in the company in The Motley Fool’s new premium research report. In it you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices. Click here for instant access.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Panera Bread and Starbucks and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters, short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters, and short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, Panera Bread, 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.If you have questions about this post or the Fool’s blog network, click here for information.
