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Starbucks: Growth Story Will Continue

June 26, 2014 | About:
Value Investor

Value Investor

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Starbucks continues to surprise investors with its double digit revenue growth, considerable margin expansion and 15%+ earnings per share growth for the past four years. The only explanation to this is solid growth drivers of the company. In this article I will discuss some of the key points, which will help Starbucks to continue creating shareholder value.

New Store Growth

Starbucks is rapidly expanding in China and Asia-Pacific region with China being the prime expansion location. The company has plans to open 1,500 new stores in fiscal 2014, with about 750 net new stores in China. By the end of 2016, the company plans to operate 1500 stores in China, second largest market for Starbucks.

The company now has 15 years of presence in China and more than 20,000 partners; through these, the company has witnessed considerable growth in the region. This is due to improving purchasing power of the country and likeliness for coffee. For fiscal 2014, Starbucks estimates 24% revenue growth and 63% return on investment (ROI) from new stores in China. This is an impressive number for investors.

Apart from China, the company plans to open 600 new stores in U.S and 150 new stores in EMEA. US have always been the biggest market for Starbucks and with further expansion of stores it is estimated to give 40%+ return on investment.

Innovation At Its Best

In early 2009 Benjamin Vigier, now with Apple (AAPL) had introduced a mobile card app for Starbucks in 16 stores. Since then, the app was so successful that it rapidly expanded throughout the nation. Today, more than five million payments are made through mobile app every week, with ten million users using the mobile and loyalty app.

The company has clear intentions of launching the app and was not launched just because other retailers were in it. They had clear business strategy which involved rewarding customers with loyalty points, increasing engagement and driving new business for themselves.

Careful research has led to the introduction of features like digital tipping, social sharing, and birthday rewards etc. Also, since mobility had always been a major disruptor for retail businesses, introduction of such a simple to use app by Starbucks has helped in driving their business growth further. The success is evident with mobile payments representing 14% of the company’s in-store transaction in US and loyalty members making 25% of all the transactions.

Good Entry Dividend Stock

Starbucks currently offers a low entry level dividend yield of 1.40%. But the company has increased its dividend by 27% in the last four years.

I would further discuss how the company would continue to increase its dividend and hence create shareholder value in the next three years. My analysis has the following two assumptions

a) As per the company’s guidance; Starbucks would continue to increase its EPS at the rate of 18% (average of 15%-29%)

b) Payout ratio of 40% (average of 35%-45%) would continue in the next two years also.

The table below suggests that considering the above assumptions and company’s guidance, EPS would increase by 64% by the end of fiscal 2016, whereas dividend would increase by 43%.

In addition to this Starbucks plans to repurchase shares of worth $0.3 billion in FY2014, this would help the company to meet its target of 15%-20% EPS growth.

 

2014E

2015E

2016E

EPS

2.67

3.15

3.71

Payout ratio

40%

40%

40%

Dividend per share

1.07

1.26

1.49

Conclusion

Starbucks has been growing and will continue to grow with its solid growth strategies. I would recommend this stock for young investors as they have sufficient time for the company’s dividend growth story to work out. This would help income investors to attain high dividend in the years to come.

About the author:

Value Investor
A value investor.

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