Starbucks Corporation (NASDAQ:SBUX)‘s stock has given good returns post its latest quarterly results. The beverage company reported results which were inline with the expectations. With the fall in price of coffee due to the bumper harvest in Brazil, a better gross margin for the company in the coming quarters can be expected.
Starbucks Corporation (NASDAQ:SBUX) also acquired Teavana — a tea company, which adds to its portfolio of beverages. It is opening new stores in the developing countries, which have already shown tremendous increase in revenue. With its aggressive expansion plans in Asia, the company has tremendous potential to gain market share. Below, I explore the above mentioned points, which make Starbucks Corporation (NASDAQ:SBUX) a good investment.
Strong same-store sales trend
The same-store sales (SSS) have seen a 6% increase globally in the first quarter of calendar year (CY) 2013. In the US, same-store sales increased 6% over the last financial year, while in the China/Asia Pacific region the growth is about 11%. With the new product offerings and the robust consumer sentiment in the US, same-store sales are expected to remain strong in the US and Asia Pacific. Europe, on the other hand, is not seeing much strength and has been subdued due to prolonged recessionary conditions. Despite weakness in Europe, I believe, the company can still post mid single-digit SSS and 10% to 13% total revenue growth this year thanks to the strong US and Asia Pacific regions.
New stores opening
The company is planning to open 600 new stores in the US region during FY 2013 and this is going to contribute about 2% to the revenue. The company is also planning to open 600 new stores in the China/Asia Pacific region. With increasing purchasing-power parity (PPP), this region will continue to contribute to the company’s revenue. I expect growth of 15% in revenue from this region in the coming years.
Channel development segment
The company’s consumer products, which are sold outside of company stores in the retail channel, have shown impressive growth of about 50% in FY 2012. In the first quarter CY 2013, channel-development revenue has increased by 7% over Q1 CY 2012 primarily driven by Starbucks Corporation (NASDAQ:SBUX) and Tanzo-branded K-Cup packs. I believe this segment will contribute high single digits to the company’s top line and bottom line in the coming years.
Acquisitions and collaboration
The company has been aggressively trying to venture into new avenues which have the potential to increase its traffic. It has acquired Teavana and La Boulange, a bakery that will help it bolster its food sales. This will help the company target the tea-segment customer. This segment will grow in double digits given the company’s brand recognition. The company has also entered into a long-term relationship with Hong Kong-based Maxim’s group to operate its stores in Vietnam. This will get Starbucks Corporation (NASDAQ:SBUX) a foothold in eastern Asia.
Peer Analysis:
| Metrics | RoA | ROIC |
|---|---|---|
| Starbucks | 17.80% | 25.80% |
| Krispy Kreme Doughnuts | 5.28% | 7.63% |
| Dunkin Brands | 3.40% | 4.90% |
Dunkin Brands Group Inc (NASDAQ:DNKN) is primarily known for breakfast coffee with doughnuts. The company is mainly concentrated in the Northeast with plans to open new stores across the US. The comparable same-store sales growth for the company is around 5%. Dunkin is planning to open 700 to 800 new stores in FY 2013, which would be a 4% increase. The company right now is more focused on the US. It is also trying to expand its offerings. It is selling K-cups to capture the home market. The company is trying to increase its ROIC, which is currently 4.9% as compared to Starbucks’ 25.8%.
Krispy Kreme Doughnuts (NYSE:KKD) is another major player in the beverages segment. The first-quarter FY 2013 result beat Street estimates both on revenue and profit fronts. According to the management, this has been achieved mainly due to an increase in same-store traffic and partially (about 3%) due to the pricing effect. Following this performance, the management has upgraded the initial guidance for earnings for FY 2013 from a range of $0.53 to $0.57 to $0.59 to $0.63. The company has experienced growth in same-store sales continuously for the past 18 quarters.
Bottom line
Starbucks has been trading at a discount compared to its peer Dunkin Brands Group Inc (NASDAQ:DNKN). I think Starbucks is a good buy given its consistent performance and well directed diversification and expansion plans. The company has been able to rapidly expand in new markets, which has contributed handsomely to both the top line and bottom line.
The company has also successfully launched new products, which has added double-digit growth to revenue. It is also diversifying its offerings, which can be seen by the acquisition of Teavana and La Boulanage. These additions will help it to generate higher revenue. With this aggressive expansion strategy, the company is well placed to outperform both the broader markets (S&P 500) and its competitors. So I recommend a ‘buy’ for this stock.
The article Global Expansion and Product Launches to Drive This Restaurant’s Growth originally appeared on Fool.com and is written Gayatri Sharma.
Gayatri Sharma has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Gayatri is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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