It is not new to see companies hiking their dividend in quarters where the performance has been weak as a way to appease investors and creating value for them. Therefore, I was not surprised when Starbucks (SBUX, Financial), the world’s largest coffee chain, increased its dividend by a whopping 23 percent that led to tripling of the number since 2010. The quarter reported by Starbucks was not really disappointing, but since it came a little short of investor expectations, a selling session was triggered. Let us analyze if this dividend aristocrat is a good buy for your portfolio.
A walkthrough of results
Starbucks announced its fourth quarter results on October 30, 2014. Figuratively, in Fiscal 2014, the company has opened a net of 1,599 stores globally, reporting a consolidated net revenue increase of 11% to a record $16.4 billion and an increment in the global stores sale by 6%. However, Q4 alone reflects the opening of 503 new stores with a net revenue increase of 10% and a growth rate of 5%. On the basis of the aforesaid, it is forecasted that in FY15 an increase in revenue growth to 18% could be seen due to the planned acquisition of the remaining 60.5% of Starbucks Japan. EPS could reflect a range of $3.42 to $3.54. Furthermore, the company plans to expand its Starbucks Reserve® coffee line to 1,500 locations globally as well as invest in footprint stores to increase decentralization of retail.
Transforming the menu
For any food chain, the critical success factor is its menu –Â i.e, basically the offerings provided to the customer. The impressive part is that Starbucks realizes this and as the company failed to meet the topline estimate again, it is focusing hard on building a robust portfolio of products. The company has developed new beverage offerings and has overhauled its food menu to increase customer traffic throughout the day. CEO Howard Schultz had earlier expressed his intent to turn Starbucks from just a coffee place to a hangout destination for people. In order to give wings to this vision, these menu changes are being executed so that customers come throughout the day.
The expansion of the company's offerings in the tea category with the Teavana brand, as well as selling handcrafted sodas and testing of Greek-yogurt smoothies, shows its focus on the high-end coffee market, with plans to sell exotic and rare coffees. Also to note, Starbucks has introduced the concept of a new super premium sub-brand “Starbucks Reserve” that would be dealing with a premium quality of the product. The company plans to add around a hundred of these reserve stores around the world, starting with San Francisco. Thus, a solid combination of new products along with excellent branding skills, is giving Starbucks the needed growth. This is a highly impressive move on the company’s part to expand into newer markets in order to source better growth.
Making its way into e-commerce
In a dozen articles across the web, the transition to digital has been covered extensively and while this trend has negatively impacted industries like retail, the food and beverage industry has also been transformed to a great extent. Starbucks is aware of the changing consumer preferences and, therefore, has positioned itself well in order to benefit from the trend. Armed with numerous tools, Starbucks is trying to leverage this shift to digital and is confident that e-commerce will be its cornerstone for growth in future.
To give you a solid example, Starbucks is planning to launch a delivery service that will make the coffee run a thing in the past. Chief Executive Officer Howard Schultz described the plan as “e-commerce on steroids,” letting customers create standing orders that arrive at their desks daily. In my opinion, a move like this will definitely create a positive perception about the brand (it already enjoys immense brand loyalty) and might help it keep competition from other chains at bay. The company clearly understands that customers love convenience (not strange in the era of mobile apps) and therefore, it is employing various means to establish its presence in the e-commerce space.
Takeaway
Starbucks is fundamentally strong chain and its wide presence enables the company to leverage any shift in consumer preferences. Though it might have missed the topline estimate but investors should realize that for the fiscal year 2014, all the major segments of the company reported a more than 5 percent increase in comparable store sales. Currently trading at a forward multiple of around 21 and a PEG ratio of 1.60, the company represents a strong, bargain buy that will reward its investors handsomely.
