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Vinay Singh
Vinay Singh
Articles (229) 

Starbucks: A Good Buy Despite Competition from Dunkin Brands

April 20, 2014 | About:

Online business has taken a toll on brick-and-mortar stores. This was affirmed when ShopperTrak, a data firm, declared there was a decline of 14.6% in shopper traffic in the U.S. during the holiday season. On the other hand, online sales grew 9.3% during the holiday season, according to the National Retail Federation. Lower shopper traffic means fewer people visited malls, leading to lower footfall at restaurants and other eateries.

However, coffee retailer Starbucks (NASDAQ:SBUX) seems to be immune to such macroeconomic conditions. Its earnings were ahead of Mr. Market's expectations, sending its stock higher.

Starbucks' tale of success

Revenue surged 11.6% to $4.24 billion over last year's quarter. Lower shopper footfall at stores affected the top line as people preferred to relax at home. Nonetheless, the coffee company managed to register same-store sales growth of 5%, which helped boost total revenue.

Geographically, sales from Asia Pacific grew well, with same-store sales growth of 8%, since most of the newly opened Starbucks stores were in this region. Moving down to the bottom line, earnings for the quarter jumped north to $0.71 per share, compared to $0.57 per share in the year-ago quarter. This was way ahead of the Street's expectations of $0.69 per share.

In fact, Starbucks' CFO, Troy Alstead, said the company should not be much affected by growing online business since customers' experience at Starbucks cannot be duplicated online. Hence, the company does not fear burgeoning online purchases. Moreover, Starbucks has big plans for taking advantage of the popularity of online sales. It will be launching mobile ordering, which will enable people to place their orders at Starbucks through their mobile phones.

Some interesting moves

Starbucks has been trying to expand its product menu in order to give customers more reasons to visit its stores. The coffee company bought La Boulange, a bakery, in 2012, which expanded its list of offerings such as pastries. It also acquired Teavana, a tea retailer, adding tea to its product portfolio. Additionally, it plans to sell Greek yogurt parfaits through its partnership with Danone SA. These expansionary moves are in addition to new coffee products such as VIA lattes, launched recently, in vanilla and cafe mocha flavors. Starbucks' diversification into new and different product lines should help attract more customers.

A brighter future awaits

Starbucks also plans to open 1,000 new stores during the current year. The new stores will help boost its revenue further. Even Dunkin Brands (NASDAQ:DNKN) plans to expand its footprint by adding new stores. In fact, it plans to open more stores over the next 20 years, taking its store count to 14,000 in the U.S. Dunkin Brands recently announced its plans for expansion onto university campuses in order to attract students, faculty, and other college staff in between classes. The company is expected to open around 800 stores in 2014, with a special focus on U.S. and China--Dunkin Donuts has entered into an agreement to add 100 locations in China. Thus, Starbucks faces stiff competition from this company's growing presence.

Also, Starbucks' Verismo faces competition from Green Mountain Coffee Roasters' K-Cups and single-serve brewers. Green Mountain was the first to introduce single-serve brewers, and is now in 13% of U.S. households. Moreover, Green Mountain recently entered into partnership with Campbell Soup, which will give wider exposure to the company.

The bottom line

Despite tough competition, Starbucks has been a commendable performer with growing sales at its existing stores. Its expansion into new regions as well as new products should be helpful in adding more customers. Moreover, its efforts such as new variations to its existing product line, a loyalty gift card program, and mobile ordering app should add to its advantages.

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