Starbucks Looks Like a Million Bucks!

Ramesh 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 first-quarter fiscal 2013 earnings that blew past revenue expectations on Wall Street.  The company also reaffirmed fiscal 2013 targets.  Will investing in Starbucks give your portfolio a caffeine jolt?

Strong growth

Starbucks' revenue rose 11% in its most recent quarter, continuing a string of impressive growth throughout 2012.  The company reaffirmed predictions for similar expansion in fiscal 2013.

The company has opened over 1,000 new stores globally in fiscal 2012, and it expects to open another 1,300 in fiscal 2013.  Operating revenue for fiscal 2012 was higher than fiscal 2011, and the company expects to improve it by a full percentage point in fiscal 2013.  In short, the growth trajectory for Starbucks looks rosy.

Operating margin for Starbucks was 16.6% for the first quarter of 2013, up from 15.4% in the previous quarter.  After dipping briefly a year ago, these margins have been steadily increasing in recent quarters, reflecting a mature, yet growing company with a worldwide presence. 

How Starbucks Got There

It seemed that at the depth of he economic downturn in 2008, Starbucks was doomed; many observers predicted its demise. Founder Howard Schulz had just returned to the helm in an effort to save the company. The immediate items on his agenda were to close unprofitable locations, restructure the company, and open more stores globally.  As his plans got under way, the company struggled through difficult times.  The stock reached single digits in late 2008 before getting past the teens in late 2009. It was a rough climb back up.

This 2010 New York Times article describes how Mr. Schulz helped turn around the company and recaptured the imagination of both its customers and its employees. Key to his success was the idea that employees needed to revitalize their sense of belonging to the company through the revival of a "startup" culture.  He also changed the coffee ordering process, encouraging purchases from smaller suppliers as well.  In fact, Mr. Schulz has taken on an active role in job creation through support and encouragement of small businesses.

Through a renewed focus on its customers, its suppliers and the communities that it is present in, Starbucks appears to have a holistic turnaround that is reflected in the rebound in the stock.

Competitive Landscape

Dunkin’ Brands Group (NASDAQ: DNKN), owner of the Dunkin Doughnuts store chain, and McDonald’s (NYSE: MCD) have gone after Starbucks’ core business by offering gourmet coffee drinks of their own.  However, while they have shown impressive results, it is unclear if they have taken away market share from Starbucks.

Dunkin reported fourth-quarter 2012 and full-year 2012 results on Jan. 31.  Its adjusted operating income was up by about 16% from the previous quarter, and its adjusted operating income margin was about 47%. Dunkin's third-quarter 2012 results, released in October 2012, showed a 12.5% adjusted operating income increase over the previous quarter, and an adjusted operating income margin of 49.7%. Dunkin’s results have been pretty much consistent for the previous few quarters.

McDonald’s reported fourth-quarter 2012 and full-year 2012 results on Jan. 23 that were similarly impressive.  Operating income increased by 4% and revenues increased by 2% from the previous quarter.  Their earnings per share increased by $0.05 from the previous quarter.  Their full-year results for 2012 reflected a 3% revenue increase over 2011.

How They Compete

McDonald’s and Dunkin’ Brands represent two opposite ends of the spectrum when it comes to the strategy of competing with Starbucks. McDonald’s offers the McCafe line of gourmet coffees, which appear to compete with Starbucks' coffees. Dunkin’s Brands offers a premium line of espressos, cappuccinos, and lattes.  However, are they direct competition to Starbucks, which sells higher-priced coffees? 

McDonald’s found it necessary to explain the higher price point for its gourmet coffees in its FAQs.  In its last 10K report, McDonald’s lists “specialty coffee shops” as a competitor.  It also says that its restaurants and franchises “continue to expand their coffee business,” and discloses over 1,500 McCafe locations.  For a while, during the depth of the economic downturn, it appeared that McDonald’s was indeed offering an alternative. Recent earnings results for Starbucks, however, tell a different story.

Dunkin’ Brands, on the other hand, is trying to compete with Starbucks on other fronts as well.  They are aggressively promoting the K-CUP, much like Starbucks is promoting their brandDunkin’s coffee is found at retail outlets such as supermarkets, much in the same way as Starbucks.  Apart from the supermarket coffee aisle, both have burgeoning in-store full service locations.  McDonald’s does not compete with Starbucks in the same way as Dunkin.

Prospects for Starbucks

The future of Starbucks looks bright.  It appears to have reclaimed its mojo, and seems set to continue its expansion both in the US and abroad.  While Dunkin’ Brands appears to pose the most direct threat to Starbucks, it doesn’t quite have the same, nearly ubiquitous presence across the globe.  For quite the foreseeable future, therefore, Dunkin’ poses no immediate threat. 

McDonald’s and other fast as well as fast casual restaurants might appear to offer an additional alternative as well.  However, they are just that – an alternative. It, too, poses no immediate or long-term threat to Starbucks' domination. 

I rate Starbucks a buy.

malayappan has call options on SBUX. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus