Starbucks Is Steaming Hot!

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

A company that posts rocking quarters, provides great returns to its investors, and keep increasing its dividends is one that deserves a special place in your portfolio. That incredible company is Starbucks (NASDAQ: SBUX), a premium coffee provider that has proven itself by posting a stellar quarter recently. The coffee maker’s first quarter met the Street’s expectations in spite of ongoing macroeconomic problems.

This is in contrast to other companies that offer high-end products, such as Coach. Coach’s latest quarter was quite disheartening to investors as lower customer spending hurt the company’s sales. Its higher prices and lower promotions led to lower customer traffic, especially in the American market. This was even more surprising since the quarter included the holiday season, which is considered to be the peak retail season. However, the retailer finds great potential in the international markets where revenue has been growing remarkably, making Coach bank on its international operations and helping it grow stronger.

The Real Hero and Its Achievements

Starbucks, on the other hand, has overwhelmed its investors even in such a situation. The coffee retailer is a customer favorite even though it charges a premium for its products. People seem to be unmoved by economic conditions and price changes when it comes to delicious coffee at Starbucks, leading to a continuous rise in its revenue of 11% over last year. A key driver for the top line growth was the addition of new stores during the quarter.

The company’s strategy of closing down unprofitable stores in the United States worked well. The American market brings in most of Starbucks’ revenue and after the reorganization the region performed even better, with higher footfall as well as larger transaction sizes on each visit.  Additionally, the company also performed well in emerging markets. Its revenue from China and Asia have been growing on a continuous basis. Key reasons for the growth are higher consumer demand in these  countries, as well as Starbucks’ expansionary moves.

The retailer has been very active on all fronts. Its drive for new strategic initiatives helps lure more and more customers in. For example, its deal with the payment provider company Square helped Starbucks customers pay for their coffee bills on their mobile phones. Moreover, its recent launch of Verismo and single cup coffee pods sizzled the market with great market reaction. It has already become very successful and is expected to contribute largely to the company’s revenue. Starbucks is not alone in offering such a product. Even peers such as Dunkin Brands Group (NASDAQ: DNKN) and Green Mountain Coffee Roasters (NASDAQ: GMCR) have been reaping the benefits of a similar product called K-Cups.

Green Mountain was the first to introduce the Keurig brewer, which caught all customer attention, especially in the U.S. The company made a lot of money out of the sale of K-Cups. It enjoyed leadership in this niche for quite some time, with 200 varieties of licensed as well as owned K-Cups.

Even Dunkin Brands witnessed happy days because of the introduction of K-Cups, especially with the introduction of new flavors. But the gala seems to have come to an end as customers find Verismo increasingly affordable. Green Mountain now expects stagnating sales as indicated by its dull outlook for the current quarter. However, Green Mountain is planning to add new products to its portfolio in order to boost sales. New product launches might give Starbucks stiff competition.

Future Looks Increasingly Bright

The premium coffee provider has been equipping itself quite well in order to fight any competitor in the market. Its strategies and product quality make it the best industry player. However, here are some additional points that will strengthen this notion.

The company plans to open 1300 new stores in the months to come, which shows the large growth prospects of the company. It plans to increase its production capacity as well as attain more efficiency. Its main area of focus has been expansion in the Asian region. This region already has a lot of thirst for the amazing coffee. Hence, expanding in this area is definitely a smart thing to do.

Even peer Dunkin Brands is planning to add a large number of stores this year. In fact, it plans to double its stores in the next two decades. Dunkin Brands has been using expansion as its key strategy for growth. With 665 new restaurants already in place, Dunkin Donuts plans to further expand its footprint with 700 to 850 new stores this year, with a special focus on Southern California.

Starbucks also plans to add Vietnam to its geographical reach. This area is of particular interest mainly because of the citizens there who are highly addicted to coffee. China and India also show great demand, and the company is planning to reach out to its customers in large numbers.

The coffee retailer is also eying other product offerings in order to diversify its portfolio. It has recently entered the tea market through its acquisition of Teavana Holdings Inc. However, it is not the first time. The company had also bought Evolution Fresh and La Boulange Bakery in order to diversify into fresh juices and bakery offerings, respectively. This will create more opportunities for the company to grow.

Conclusive Thoughts

Given the strong performance, continuous strive for customer delight, and great return to investors, Starbucks has lived up to its name of being a star performer. But an investor is more interested into the future of the company, which is even brighter for the coffee maker. The addition of new and varied products along with expansion into new geographies makes this company increasingly attractive. Moreover, the launch of the Verismo and the introduction of the ease of mobile payments is attracting customers galore. A prudent investor should never let go off this stock. Starbucks will definitely help you earn more bucks in the future.


justhimanshu has no position in any stocks mentioned. The Motley Fool recommends Coach, Green Mountain Coffee Roasters, and Starbucks. The Motley Fool owns shares of Coach 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!

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