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Do Not Miss Out on Starbucks' Growth Story

May 08, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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The other day I was reading a story on how some of today’s most successful entrepreneurs made it from rags to riches by following their instinct and working hard. One of those eminent personalities was Howard Schultz who has grown the coffee chain Starbucks (SBUX) to a colossal enterprise from just 60 stores that it had at the time he bought it. There is no denying the fact that Starbucks’ business has grown exponentially over the past few years especially in the emerging markets like India and Japan. Let us analyze if it’s a stock worthy of your investment portfolio.

Solid Results

The company released its quarterly earnings just a couple of weeks back wherein it reported $3.9 billion in revenue, a growth of 9% year over year. Also, operating income expanded 18% because of solid margins in all of the segments. EPS increased to a second quarter record of $0.56, up 17% excluding a non-routine gain in prior year. The highlight of the call was an increase of 6% year over year in comparable store sales, which is a highly significant metric for retail stores. This number signifies the difference in revenue generated by a retail chain's existing outlets over a certain period (often a fiscal quarter or a particular shopping season), compared to an identical period in the past, usually in the previous year. By comparing sales data from existing outlets (that is, by excluding new outlets or outlets which have since closed), the comparison is like-to-like.

The solid results for the quarter can be attributed to reinvention of the company’s Teavana business as well as initiation of next-gen payment and loyalty programs complemented by a well-trained staff. For instance, the company just started off an evenings program wherein it serves wine and other alcoholic beverages to about a 1,000 stores this year. This along with other initiatives is what has kept the coffee chain growing over the years. The ability to differentiate itself from any regular coffee maker has given immense brand equity to Starbucks and no doubt, the company has leveraged it well.

Robust Growth in Emerging Markets

At the outset of this article, I mentioned a point about Starbucks’ growth in the emerging economies like India and China. In fact, as per the quarterly results, growth was particularly strong along the China and Asia Pacific regions, where "high traffic" in China drove growth rates up to 7% for the quarter. The revenues in China Asia Pacific (CAP) grew 24% to $265 million in quarter two. This is the 14th consecutive quarter of revenue growth in excess of 20%. In fact, in 2010, the first year that CAP came to existence as a separate region, revenues totaled only $410 million. Now in 2014, the company is well on its way to exceeding $1 billion in annual revenue. Thus, there is immense scope of growth as testified by management’s optimism in these countries and the company is also well-placed to take advantage of the opportunity.

Maintaining Freshness in the Product Portfolio

A retail chain especially of the size of Starbucks can survive and grow only if it innovates in its product portfolio. Starbucks has wonderfully executed on this front over the years due to which it has enjoyed the loyalty of its customers. As I talked above, the company reinvented its Teavana business by launching Teavana tea bars in October, 2013. The company saw considerable growth in the sales of Teavana tea. The company opened around 337 new Teavana tea bars during the second quarter of this year, and the performance of these bars surpassed analysts' estimates during this quarter. As mentioned in this article, Starbucks officials have said that if all goes well, then the company will launch more Teavana tea bars in all U.S. stores up until 2015.

Besides Teavana, the company is also poised to launch Fizzio, a fantastic cold and refreshing beverage with the arrival of warm weather, Fizzio combines the healthy all-natural, preservative-free alternatives to sugar-filled sodas with the magic of a custom handmade beverage. Starbucks has completed the pilot run for this product and its success has prompted the company to launch the beverage out to 3,000 stores in the U.S. Sunbelt, Singapore, Korea and several cities in China this summer.

Final Words

In my view, Starbucks is a fundamentally strong company having all the ingredients of a successful high-growth retail chain. From a fresh product portfolio to an efficient customer service complemented by a thoughtful expansion program in prospective areas, the company has it all in its kitty. Hence, I would strongly advise a position in Starbucks, a big-time achiever.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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