Retail Coffee Sector Still Brewing Strong

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

The retail coffee sector continues to percolate, led by the great second quarter results of Starbucks.

Starbucks(NASDAQ: SBUX) second quarter saw solid growth in sales and profits. The stock is trading close to all-time highs. And some analysts contend the share price will continue to climb. Their argument is based on the successful introduction of a new menu that features more options. This includes salads and the recently acquired La Boulange baked goods. Starbucks has also begun an initial push into China with the coffee king’s ready-to-drink line of beverages.

Starbucks on a Bullish Run

Starbucks stock has been running with the bulls for several years, and 2013 continues a significant upward trend over the last four quarters. For Q2, earnings per share grew by a whopping 28% year over year. The retailer reported this was due to an increase in revenue and improved operating margins - 16.4%. The margin figure, in turn, stems from lower bean costs, which are expected to last.

Further, Starbucks raised its full-year earnings forecast to about $2.23 per share and expects earnings per share growth in 2014 of 18% to 22%. Moreover, Starbucks recently increased prices on some items which should support solid margin figures going forward. Some observers contend the improved margins will eventually spill over into the company’s dividend payouts – currently a bit light at 1.2%.

In sum, the coffee house continues to focus on food and healthy snacks. The baked La Boulange line has been particularly successful with breakfast shoppers looking for a better bite than bagels and donuts.

Starbucks Has Allies

In addition to focusing on food, the company is looking to grow by way of strategic alliances. The company is said to be negotiating a deal with Dannon to come up with an original line of yogurt even if coffee flavored yogurt cultures may not be everyone’s cup of tea.

A proven successful strategic play for Starbucks has been with Green Mountain Coffee Roasters (NASDAQ: GMCR). Green Mountain is the maker of Keurig K-Cup coffee machines. These little brewsters have turned up in offices across the US - possibly leading to less fighting among co-workers as to who’s been leaving the coffee room such a mess.

But the K-Cup brewers offer an array of flavors, and this has been the cornerstone of Green Mountains’ success. Further, the coffee roaster has an agreement with Starbucks to package and distribute the coffee chain's hot beverages in a K-Cup format. And Starbucks is selling the brewing machines in their stores. This has been a win-win venture.

Green Mountain also recently announced excellent second quarter results. The company had earnings of $1 billion, and revenues climbed by 13.5% compared to the same period in 2012. As java drinkers and investors know, revenue is the mother's milk of future earnings growth and ultimately share prices as well.

Panera May Be Lagging

While Starbucks and Green Mountain have exceeded analysts’ expectations this year, the same cannot be said for Panera Bread (NASDAQ: PNRA).

The cafe and bakery chain recently reported slower-than-predicted revenue growth. It appears that Starbucks' successful launch of the La Boulange line may have taken a bite out of Panera’s breakfast line. In fact, the company had lower comparable store sales than originally forecast. This was blamed on a falling number of transactions and a spiral in sales of breakfast items.

At the same time Panera Bread reported good news as the bakery chain opened 35 new stores in the second quarter (following the opening of 21 stores in the first quarter). And the company intends to open another 50 to 60 stores by the end of the year. Finally, while revenues came in slightly lower than anticipated – growing by 11% compared to the second quarter in 2012, this was a decline of 2% from the first quarter in 2013.

Premium Price for Latte?

 In the end, while the second quarter has been profitable for Starbucks, Green Mountain, and the retail coffee chain sector, investors should consider these coffee makers are selling at a premium. And for coffee lovers, there’s always the choice of buying a K-Cup brewer and enjoying your favorite cup of Starbucks brew at home.

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Kyle Colona 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!

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