Starbucks Corporation (SBUX): The Coffee’s Hot, But the Stocks Are Steaming

One of my favorite consumer companies reported its third-quarter results last week amid high expectations. If you have followed my articles over the last year, you would be fully aware of the love I’ve held for Starbucks Corporation (NASDAQ:SBUX), both as a stock and as a mobile office in my case. Shares soared over 7.5% to an all-time high following what was a spectacular quarter on every imaginable metric. I was a bit taken back with such a move after the incredible run to the upside over the past few weeks.

However, the move is completely justified. I sat and tried to find negatives within the earnings report and conference call, yet I couldn’t establish any significant problems with the quarter nor guidance. Wall Street felt the same, and a number of powerhouse investment banks upgraded the stock with higher price targets, including Goldman Sachs Group, Inc. (NYSE:GS), which raised its price target to $84 per share.

So you may worry about getting into the stock today. I would be with any company which has moved so far so fast. However, I would like to make the case as to why shares may not be done just yet. In this article I would like to review the company’s recent performance and growth potential going forward.

Record performance

Starbucks Corporation (NASDAQ:SBUX)’ global comparable-store sales rose by 8% in the third quarter as a result of a number of tailwinds, including higher traffic and per-ticket revenue. On a segment-by-segment basis, there is strength within all areas of business. The company was able to grow by 9% in both the Americas and China/Asia Pacific segments. This growth was due in large part to a 7% increase in traffic through the company’s impressive number of locations.

Revenue in the quarter increased by a full 13% over last year to a record $3.7 billion. Rising revenue in combination with 150 basis-point improvement in operating margins allowed the company to generate record earnings per share. Third quarter EPS of $0.55 per share, a 28% increase over last years’ third quarter, represents the second-highest quarterly earnings per share in Starbucks Corporation (NASDAQ:SBUX)’ 42 year history.

The key to much of Starbucks Corporation (NASDAQ:SBUX)’ success over the last few years has been the full roll-out of its rewards program. By pushing consumers into its rewards program, the company realizes some major benefits. First, the company saves itself from costly transaction fees on every sale. Second, loyalty; consumers are carrying around a gold card with their name printed on it. What more could a coffee drinker want as a status symbol?

In the quarter, the company saw 3% year-over-year growth in total dollars loaded on Starbucks Corporation (NASDAQ:SBUX)’ cards in retail North America and nearly 100% year-over-year growth in dollars loaded on cards via Starbucks’ mobile apps and web properties. Going forward, the focus on the rewards will help margins and revenue.

New partner

Moreover, the move to diversify its business across a number of segments will help stabilize the high growth rates. Starbucks Corporation (NASDAQ:SBUX) announced it would be partnering with Danone SA (ADR) (OTCMKTS:DANOY), the leader in everything yogurt through its Dannon brand. The partnership will combine the recently acquired Evolution Fresh brand and the dairy expertise from Dannon.

Dannon stands in a great position within the United States with 30% market share, however, its product demand falls short comparison to European markets. In the United States, we are seeing a shift toward Greek yogurt. The deal could offer Dannone the ability to increase its market share as demand rises to European levels. The first product the company will be launching is a ready-to-eat Yogurt parfait to replace Starbucks Corporation (NASDAQ:SBUX)’ current Greek offerings.

Dannon-branded ready-to-eat Greek yogurt and Evolution Fresh-branded CPG products co-created by Starbucks and Dannon will start rolling out at Starbucks Corporation (NASDAQ:SBUX) stores in North America in the spring of 2014. They will reach grocery channels in 2015 and reach global distribution over time. I would expect the partnership to be accretive to revenue and brand recognition for both companies in the years ahead.

Don’t forget about Donuts

While the street was diving into Starbucks Corporation (NASDAQ:SBUX)’ spectacular quarter, Dunkin Brands Group Inc (NASDAQ:DNKN), the owner of everyone’s favorite doughnut company Dunkin’ Donuts, reported better-than-anticipated quarterly results. The company reported $0.41 earnings per share for the quarter, beating the analysts’ consensus estimate of $0.40 by $0.01. Revenue, however, did fall short; Dunkin’ generated $182.5 million in the quarter compared to the consensus estimate of $183.8 million.

On a year-over-year basis, the results were good. Earnings and revenue grew by 24.2% and 5.9%, respectively. Over the coming years, the company has bold expansion plans domestically and internationally. Dunkin Brands Group Inc (NASDAQ:DNKN) is looking to offer its innovative menu to the Western U.S., something I am truly looking forward to.

Spending time on the East Coast for college, I frequent my local spots almost daily; everyone needs a vice after all. In addition to the growth here at home, Dunkin Brands Group Inc (NASDAQ:DNKN) is looking to makes dents in India and Asia. Going forward, I would bless an investment in the company as it have proven successful in differentiating itself through menu innovation across the globe.

Conclusion

Coffee may be hot, but these coffee companies are steaming. Starbucks Corporation (NASDAQ:SBUX) is firing on all cylinders here at home and abroad. Increasing revenue streams through partnerships with leaders such as Dannon bode well for diversified growth in the decades ahead. Dunkin Brands Group Inc (NASDAQ:DNKN) quietly reported a good quarter, yet remains in a different league from its coffee competitor Starbucks. At the end of the day, you need to ask what do I want to own? I remain long Starbucks even with the great run to the upside already this year. Any pullback would be a gift from weak hands as far as I’m concerned.

The article The Coffee’s Hot, But the Stocks Are Steaming originally appeared on Fool.com.

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