Starbucks Looks Increasingly Attractive

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

Amongst the weak performers in the food industry we have a shining star that has outperformed its industry peers and reaffirmed its strength in the coffee segment. Starbucks (NASDAQ: SBUX), the largest coffee provider in the world, has defied the industry trend of weak performance. Its fourth quarter results lit up the Street, sending its stock prices higher.

Analyzing the Quarter

Boosted by new store openings and increased customer traffic, revenue grew 11% to $3.36 billion. Not only was customer traffic higher, but each customer's average spend was higher as well. This was all thanks to the company’s stunning moves, each directed towards luring more and more customers. Even earnings grew a whopping 24% to $0.46 per share, driven by huge demand and amazing cost cutting measures by the coffee maker.

These results are in sharp contrast to companies such as McDonald’s (NYSE: MCD), which have been hit hard by economic slowdown, leading to lower revenue. Moreover, a stronger dollar has been a major factor for lower McDonald’s international earnings. Both revenue and earnings dropped in its recent third quarter results. The prevailing tough environment in Europe has also played a crucial role in McDonald’s performance over the last year.

Efforts Well Paid Off

On the other hand, Starbucks has been enjoying a gala time. It opened 413 new stores during its fourth quarter, which drove revenue higher. Moreover, its great promotional strategies worked largely in its favor. Its programs such as “Treat Receipt,” which provides discounts to customers who visit the café twice in the same day, attracted a lot of customers.

The company is also active on the new product development front. Its new products, such as a single serve coffee brewer called Verismo, have been growing at a rapid pace. It ranges from $99 to $199, and is expected to become a significant contributor to Starbucks’ bottom line. The price is also set strategically against other similar products made by competitors such as Green Mountain Coffee Roasters (NASDAQ: GMCR). Green Mountain’s Keurig brewer was the first of its kind and had captured significant market share in the U.S. Starbucks was initially offering K-cups for Green Mountain’s coffee machine and later started its own Verismo.

Another company that benefitted largely from the growing demand in K-cups was Dunkin Brands Group (NASDAQ: DNKN). It witnessed a 4% growth in K-cups comps and is expected to further profit from the launch of new flavors.

Strategies

Starbucks has been very active on expanding its product line. It recently acquired a juice making company called Evolution Fresh in order to expand its product portfolio. Its move of expanding into healthier products is quite lucrative, as customers are becoming highly health conscious. In fact, it has also opened a new juice-making plant with an eye to expand its juice production.

The coffee provider has also struck a deal with Square, a payment gateway company, in order to make payments as easy as a click of a button on a smart phone. Its customers will be able to make payment through their phones at Starbucks.  Even Dunkin Brands have followed a similar path and has introduced a mobile application for smart phones through which payment can be made. It will also help Dunkin to provide more offers through the application. M-commerce business is a growing segment, and the players are expected to reap its benefits.

The Takeaway

The company is making all the right efforts, and most of them have started paying off. Due to expansion and diversification of product lines, Starbucks is attracting customers galore. With strong growth in China the company is eyeing to expand in India as well. It plans to open another 1,300 new stores on a global basis in 2013. Moreover, it has also paid a dividend, which makes it attractive to investors. This coffee maker will definitely make your portfolio shine.

Dig Deeper

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justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's 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, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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