This Cup of Coffee Will Brighten Up Your Day

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

The world’s largest coffee-shop operator, Starbucks (NASDAQ: SBUX), reported its fiscal first quarter results on Jan. 24, 2013. Revenue and EPS were better than the prior-year quarter, helped by the continuing growth in U.S. and Japan.

The numbers

Starbucks reported revenue of $3.80 billion, 11% higher than the prior-year quarter's $3.44 billion. EPS surged 14% from $0.50 to $0.57 in the current quarter. Same-store sales improved in America by 7% because of increased customer traffic and price.  Also, Asia Pacific region same-stores sales grew 11%. Considering the prevailing economic condition where only few companies have been able to thrive, Starbucks performance is really phenomenal.

Coffee machine and more

In competition to the Keurig, owned by Green Mountain Coffee Roasters, (NASDAQ: GMCR) Starbucks introduced the Verismo, the at-home coffee brewer last year. Starbucks has sold over 150,000 Verismos since its launch. Moreover, to compliment the good start, the company has come up with an upgraded new model and other economical models starting at $200.

Starbucks sold 175 million K-Cups in the first quarter. The company sells over 25% of the total volume of K-Cups thereby helping itself and Green Mountain’s revenue north. Green Mountain’s K-Cup patent expired this September that allows Starbucks to sell its own pods along with the coffee machine. Starbucks will surely be benefitted with its instant coffee packet version because of its amazing brand value. Till Starbucks instant coffee packets reach consumers’ home it will continue to benefit itself and Green Mountain by selling K-Cups.

Starbucks acquisition of Teavana, a chain of tea stores in the United States, clearly shows their intention to enter tea market in the same way as coffee. In 2012, when it purchased Teavana there were 300 stores and by the end of this year it will add 30 more stores. Starbucks has opened its first three stores in India, which is a very big emerging market apart from China. Indians’ are fonder of tea than coffee, so if the company plans to expand its operations in India, its acquisition of Teavana will surely deliver.

Also Starbucks acquisition of San Francisco bakery chain is a step to expand its food offerings. The purchase has started to pay off and the chain is ready to expand its offering to Seattle, Los Angeles, Chicago, and New York City. This should boost the company’s food sales and improve same-store sales.

Competitors

The two main competitors in the industry for Starbucks are McDonald’s (NYSE: MCD) and Dunkin’ Brands (NASDAQ: DNKN). McDonald’s has a worldwide network of fast food restaurants in over 120 countries. It is currently selling bags of ground coffee at its 1400 restaurants in Canada along with its other food offerings. The company is planning to spread coffee across the globe if it performs well in Canada. Starbucks would face serious competition worldwide, as a major market share might move towards McDonald’s if its coffee is well accepted by consumers.

Dunkin’ Brands is relatively small compared to the other two companies, but it is in its growth stage. The company has plans of opening more than 15000 restaurants in the U.S. in the next 20 years and becoming a chain in airports, casinos, universities, and super markets. It has been trying to increase its coffee offerings by using catchy taglines, such as “America runs on Dunkin,” and promoting itself as an inexpensive brand compared to Starbucks. Moreover, its Donuts food offering competes with Starbucks’ in-store premium bakeries.

Take away advice

Starbucks currently has its foothold in 61 countries. It is entering new emerging markets, creating new products and acquiring companies to help it sustain its growth. The company has plans to return good amount of cash to its investors in the form of dividends (which has become thrice in the last two years) and share repurchase in the coming quarters. Starbucks might be facing tough competition from other players in the market but it is well positioned to enjoy its dominant position in the coffee market. I feel it is a safe investment option.


vrindakedia has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, 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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