There are a few daily products that are indispensable in our lifestyles and therefore, by an extension, the demand for these products is highly consistent and sustainable. One of the best examples of such a product is coffee as it has been so strikingly integrated with our daily routines that it has almost become an automated reflex. In keeping with this philosophy, the stock I have picked up for today’s analysis is Starbucks (SBUX), which has almost doubled in the last three years. However, if we look at last year’s data alone, the stock has had a pretty volatile run on the exchange owing to various factors like reasonable reshuffle in product portfolio, litigation with Kraft Foods (KRFT), etc. Going ahead, the prospects seem strong, yet it is prudent to analyze if the stock is a good investment bet.
A glance into the past
In fiscal 2014, Starbucks' revenue increased 11% to $16.4 billion in 2014. However, when we compare net income and free cash flow to last year’s performance, the picture is slightly skewed. Starbucks was locked in a lawsuit with Kraft Foods Group over the distribution of Starbucks’ packaged coffee to grocery store chains. The $2.8 billion Starbucks paid Kraft was expensed in Q4 2013, but paid in Q1 2014. As a result, EPS for 2013 was $.01, compared to $2.71 for 2014, and free cash flow per share was $2.30 in 2013 and (-) $.72 in 2014. However, the coffee giant was able to deliver strong results on the comps front. Global comparable store sales increased 5%, the 19th consecutive quarter of comp growth of 5% or greater. By most metrics, this was a commendable result and it is certain that Starbucks can sustain this momentum owing to its established presence in the segment. However, in terms of achieving better growth, CEO Howard Schultz is employing some innovative techniques, which I have elaborated in the next paragraphs.
Growth getters
In the recent months, the management of Starbucks has been attempting hard to transform the company’s image from a coffee vendor to a holistic restaurant-style outlet, which offers a place for customers to come in and relax. As a consequence of this, Starbucks has made umpteen number of changes in its product portfolio and considering that this month qualifies in the holiday season, the company is going overboard to raise its stakes. This Huffington Post article describes the offerings from Starbucks’ stable during the holiday season and therefore, it is a good source to understand the kind of changes Starbucks is intending to make in its product portfolio, in the long run.
Yes, as I mentioned, Starbucks is looking to beef up its menu with a longer horizon and as an effect, it has been focusing less on opening new stores in regions where its presence is wide. On the contrary, it is attempting to redesign its menu. However, some analysts believe that its bevy of new products—from Fizzio carbonated sodas to La Boulange pastries to Oprah Chai Tea Latte—have added complexity to the kitchen and slowed service. Whether there is a correlation between an increase in menu items and slowdown in service speed is hard to comment on because of lack of solid data. For one thing, it is clear that the company is implementing menu changes in a big way and as such, investors need to keep an eye out for any negative consequence that might follow.
As per a recent news report, Starbucks implemented its mobile order and pay service in Portland, the first city to launch Starbucks Mobile Order and Pay program, which can be used with the Starbucks app and rewards program. The massive change in consumer behavior that has taken place in the last decade because the advent of smartphones has pushed many a retailers to adopt mobile as a strong element in their business strategies. Not lagging behind, Starbucks has also pioneered its mobile ordering service, which is definitely expected to boost its operations and bring in better volume.
Now that the feature is already launched on Starbucks’ app in Portland, the company plans to roll out the feature city by city in 2015 (and make the order-ahead option available in its Android app). The chief digital officer of Starbucks, Adam Brotman, believes that ordering ahead will make going to Starbucks better by eliminating the “pinch point” of the line and drive more business as a result. Coming soon, Starbucks will take the concept one step further by cutting the need to go to the store altogether.
Takeaway
The primary reason behind Starbucks’ sustained growth has been its ability to stay with time and modify itself as per changing trends. Even now, the company is adopting innovation as its trigger to consistent success and because of such strong fundamentals, I believe Starbucks is a stock to own.
