A Good Start to a Great Year!

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

With the first quarter results due on Jan. 24, Starbucks (NASDAQ: SBUX) is projected to earn a profit of 57 cents per share as compared to 50 cents a year ago. This optimism is reflected in the attitudes of many analysts who have rated Starbucks a “BUY.’ Even the backlashes of 2012 haven't waned the sentiments of many investors. The double digit revenue increase in the last four years coupled with three consecutive quarters of an increase in profits have left the hopes high for many. And the stock price narrates the same story rising from $45.30 on October 22, 2012 to $54.50 today. This year’s start has been equally magnificent for Starbucks. Not that it has shown a remarkable rise in revenue by 16.4% as reflected in last year’s first quarter, but it has closed its biggest deal, Teavana holdings. This will indeed be a good start to a great year. And the belief of “this year being great for Starbucks” is backed with numerous reasons as summarized below:

A few highly smart competitive moves

Starbucks rolled out a series of marketing strategies in the past few years to keep itself abreast in the serious competition posed by McDonald’s (NYSE: MCD) and Dunkin’ Brands (NASDAQ: DNKN). The recent launch of the McCafe campaign by McDonald’s has the capability of grabbing a huge share of customers who are focused on convenience and value. Its already established stores at prominent locations with drive-thru windows provide it a great platform to compete coupled with its premium specialty beverages, which are sold at a slight discount to Starbucks. On the other hand, Dunkin’ Donuts has created its own niche in this market with its freshly made donuts along with a cup of coffee. This brand earns over 60% of its revenues from coffee. 

The acquisition of the San-Francisco based Bay Bread LLC and its La Boulange bakery in 2012 was indeed a smart move against its competitor as it helped it to beef up its food offerings.  If that’s not all, it had also introduced many marketing strategies in the same year that helped it gain back its pool of customers. Groupon alone helped it earn 1.5 million customers within 24 hours thereby allowing it to compete with McDonald’s temporarily on the value basis. It also launched in-store premium bakeries and the Verismo System. While the former helped it compete with Dunkin’ Donuts food offering, the latter helped it tap a new segment who like to brew their own coffee. The results of these continuous innovations are reflected over its total third quarter sales increase of 11% which is in line with the management expectation of 10-12%. During the same time, McDonald’s sales moved down the graph in all its geographical segments on a yearly basis.

Segment specific plans

In America, Starbucks plans to open 3000 new stores and remodel many more in a span of 5 years. La Boulange products and Evolution fresh juices will also be introduced in company-operated stores. This plan is likely to show great results as the American business has shown a growth rate of 9% in this sector last year.

In the China-Asia-Pacific segment, net revenue grew 28% in the last quarter, 2012. China, Australia, Thailand and Singapore, all have showcased a strong performance. China is likely to become the second largest market by 2014. The company plans to open 4000 new stores which includes 1000 in China, 1000 in Japan and 500 in Korea. It has also entered another big market of Asia last year, i.e. the Indian market. It plans to open 50 stores all around the country in the first year itself. Both India and China have a large emerging middle class followed by a large youth population. This has allowed Starbucks to easily blend in with this segment in China and now hopefully soon in India too.

However, the same cannot be said for Europe, Middle East and Africa as they are the only segment where it reported a decline of 2% in revenue due to unavoidable reasons like currency headwinds. But, this market is likely to pick up in the coming 5 years.

Lastly, Consumer Packaged Goods witnessed 32% growth in revenue in the last quarter of 2012. The company plans to introduce 100,000 distribution centers in 20 countries. Furthermore, Starbucks has recently closed its Teavana Holding deal in the first week of January, 2013. With this move, the company aims to “reinvent the way the world enjoys tea” exactly the same way it did with coffee three decades ago.  With an immediate change of adding Teavana stores outside malls in neighborhoods and on urban streets, a plan to eventually introduce tea bars at Teavana stores, and a strategy to introduce a few in its Starbucks stores’ menu, it looks to hold a leading position in the $40 billion global tea market. To further add to this, Howard Schultz, Chairman, President and CEO of Starbucks, hopes to establish a two-tiered market position with its existing and complementary brands, Teavana and Tazo. This plan also complements its expansion in the Asian market.  

Why Starbucks and not others?

Upon examining the P/E ratio with respect to growth rate ( this ratio indicates the fairness of price) , Starbucks shows 0.84 compared to both McDonald’s 0.76  ratio and Dunkin’ Donuts 1.04 ratio. Moreover, Starbucks’ profit margin consistency over the past three years has been good clearly indicating growth and stability for the company. On the other hand, both McDonald’s and Dunkin’ Donuts have shown inconsistent profit margins, which may eventually reflect in their performance as well. Furthermore, the forecasted earnings growth for Starbucks is 20.29% as compared to 8.83% of McDonald’s and 18.4% of Dunkin’ Donuts.

Bottom line

The consistent profit margin, the fair price, and the earnings growth have definitely made Starbucks a choice for long term returns. 

sheetal11 has no position in any stocks mentioned. 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!

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