Starbuck's Genius Is Fundamental
Justin 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), reported strong first-quarter 2013 earnings characterized by comparable sales growth of 7% domestically (6% globally) and earnings per share growth of 14%. These results met analysts' hefty expectations of the worlds largest coffee chain. The company's performance is not merely a trend, but rather is fundamental to its business and is rooted within its founding. The company has been able to build such a profitable and growing company because of its investment in its people. The company's first-quarter results are as follows:
(Starbucks Earnings Release)
These results are the tangible rewards felt by the intangible quality of Starbucks as a company. The company's greatest achievement is its ability to drive revenue and earnings in tandem through both an expansion of its footprint along with a consistent vision as to how waste can be cut from the supply chain and efficiency can be achieved. Howard Schultz stated in Starbucks last earnings release:
Starbucks strong performance in Q1 demonstrates the strength, and unique resilience, of our increasingly global business, and the power and growing relevance of the Starbucks brand to consumers and communities all around the world. Solid growth in our U.S. retail business, further expansion of our Channel Development initiatives and continued successful execution against our expansion plans throughout China and Asia Pacific all contributed to the record results we announced today. Starbucks has never been better positioned to achieve the goals we have set for ourselves around the world and I have never been more optimistic about our future.
This excitement on behalf of Schultz is not fluff, but rather a manifestation of the culture of growth and vitality that Schultz has been able to infuse within every store and associate. His relentless "culture building" is what has made Starbucks success sustainable and focused on a clear goal. Other companies like Green Mountain Coffee Roasters (NASDAQ: GMCR) do not have the diversity of offerings/business segments nor the fundamental culture that Schultz has been able to cultivate and thus do not provide investors quite the same long-term fundamental strength. Green Mountain Coffee Roasters cannot directly be compared to Starbucks because of the absence of a retail business segment.
In the retail segment itself, Starbuck's true peer group lies in both other specialty coffee shops like Tim Hortons (NYSE: THI) along with outlets that sell coffee like Panera Bread (NASDAQ: PNRA). Though Tim Hortons and Panera can be viewed in a similar context as Starbucks, Starbucks is unique because of its position in the marketplace. The stability that Starbucks has been able to achieve through its consistent strategy places Starbucks in a league of its own and places it in a slightly different sphere than any company of its size. The core values and vision of Starbucks can be seen as the drivers behind the revenue and earnings for investors. This same case cannot be made to this extent from Green Mountain Coffee Roasters, Tim Hortons, nor Panera. There is an enigma about Starbucks that has separated it for years from its competitors and this genius is fundamental to the inner-workings of the business.
On a more specific and fundamental basis, Starbucks has shown a commitment to innovating through new products along with expansion both abroad and domestically. In the past quarter alone the company has:
- Opened its 100th store in Beijing, which marks a profitable expansion into Asia.
- Enabled more than 7,000 stores to accept "Square Payment System." This move allows Starbucks to stay current with young consumers.
- Has been named one of FORTUNE'S "100 Best Company's To Work For" for the 15th year in a row. This commitment to its people is the driving force behind the company's success.
- Opened a Tazo Tea Store to explore the possibilities within Tea both as a separate and integrated vision of its core business.
These types of achievements on behalf of Starbucks is what will allow the company to continue to perform at the highest level going forward. The innovation and investment within people is what separates Starbucks from its competitors and as long as the aforementioned types of innovations are coming out of Seattle and are being executed around the world, Starbucks will reward shareholders through profitable and sustainable growth.
In terms of valuation, Starbucks is not "cheap," but is not overvalued for a long-term investor who is buying Starbucks due to its fundamental strength and potential for growth. Though slightly more expensive as accounted by some metrics than Tim Hortons, its long-term strength and potential for growth/stability do not grossly overvalue the stock in comparison.
- Forward Price/Earnings: 21.68
- Tim Hortons: 16.56
- Panera: 22.43
- Green Mountain Coffee Roasters: 14.62
- PEG Ratio: 1.42
- Tim Hortons: 1.56
- Panera: 1.40
- Green Mountain Coffee Roasters: .88
- Profit Margin: 10.50%
- Tim Hortons: 13.13%
- Panera: 7.81%
- Green Mountain Coffee Roasters: 9.40%
- Dividend: 1.50%
- Tim Hortons: 1.70%
- Panera: 0%
- Green Mountain Coffee Roasters: 0%
For investors, Starbucks is an investment in a culture of excellence and a business model that is positioned for success in the long-term. Though in the short-term the global economy could pressure margins and revenue, Starbucks is positioning itself to enter new markets like tea and coffee maker production while maintaining the enigma that characterizes its core business. As long as Schultz's vision and culture is intact at Starbucks, success shows no signs of stopping.
(All financial metrics referenced above are obtained from Yahoo Finance, CNBC Analytics, S&P Capital IQ and Thomson Reuters.)
JustinWeinstein has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, Panera Bread, and Starbucks. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!