- Co-branded debit card pipeline shows promise for Starbucks.
- Starbucks will expand ubiquity with the Nespresso pods.
- Vast untapped potential exists in emerging markets.
Beverage restaurant chain Starbucks (NASDAQ:SBUX) represents a shareholder’s dream. It puts the customer at the center of the universe by serving a quality product and providing a superior experience. Moreover, Starbucks shows no sign of letting up on aggressive growth. Starbucks wants to expand aggressively both geographically, across marketing channels, and through product innovation. Let’s examine.
Starbucks shows the public every intention of pleasing the customer. The company seems to understand that customer happiness translates into business success. Starbucks revamped its reward program in an effort to improve customer movement (throughput) within its locations. Mobile ordering can speed up the process by allowing customers to order by cell phone while in the store, making the wait shorter for drink preparation. Mobile ordering remains a small part of Starbucks’ overall transactions, meaning that a huge opportunity for throughput improvement remains.
Another way Starbucks demonstrates customer focus is its upcoming partnership with JP Morgan Chase (NYSE:JPM) and Visa (NYSE:V). Starbucks customers who use a prepaid debit card are rewarded with stars even on non-Starbucks transactions. The potential for larger transactions increase, as people looking to get “free” drinks from the card return as repeat paying customers. Moreover, the co-branding agreement represents another way for Starbucks to increase the ubiquity of its brand.
In Starbucks’ most recent earnings call, I took note of an interesting phrase that reflected Starbucks’ attitude towards the customer—the “third place”. Starbucks indicated that it wants consumers relaxed enough to utilize Starbucks as an alternative to the office and home, within reason. The company wants consumers to socialize, work and study without feeling rushed or tense. In essence, customer focus is in Starbucks’ cultural corporate DNA.
Starbucks’ CEO Howard Schultz and his management team don’t rest on their laurels. They are committed to fundamental expansion on multiple fronts. Most notably, Starbucks is committed to product innovation. The company knows this represents a must for consumer engagement and interest.
One interesting recent example is the Caramel Waffle Cone Frappuccino. This represents a temporary addition to the Starbucks’ menu for the summer. According to the Starbucks’ website, the drink is comprised of “waffle cone syrup and dark caramel sauce blended with coffee, milk and ice” and is “topped” with “waffle cone pieces” and “whipped cream”.
Starbucks wants larger ubiquity on the channel front as well. The company partnered with Nestle SA (OTC:NSRGY) and will begin offering Nespresso Pods in the European markets this fall. Starbucks highlighted the importance of expanding its brand ubiquity through Nespresso’s established customer base. This indicates Starbucks’ desire for its brand to get as many eyeballs as possible. Moreover, Starbucks wants to duplicate its American K-Cup success on the European continent.
Starbucks remains aggressive with its emerging markets strategy where its presence remains relatively low. This is especially true in China where Starbucks and other multinationals believe an expanding middle class will serve as a huge source of growth in the coming decades. Starbucks plans to open 900 company owned and franchised locations in the Asia-Pacific region this fiscal year alone. This compares to 700 in the Americas region.
Fellow Amigobulls.com writer, Piyush Arora, highlights the potential of Starbucks in India. He indicates that there are only 79 stores in operation in the country, representing 0.33% of its overall location count. Moreover, in FY 2015 Starbucks India only clocked in revenue of $26 million, representing only 0.14% of its consolidated revenue during that time. The company plans to step up its expansion efforts over the next two years in India. Starbucks has plenty room to grow in the country.
Starbucks’ fundamentals remain excellent. So far in FY 2016, the company’s year-to-date revenue and free cash flow expanded 11% and 9%, respectively, YoY. Year-to-date net income increased 16% YoY when factoring out an extraordinary gain in FY 2015. Starbucks’ balance sheet remains in excellent shape. Starbucks had $1.4 billion in cash and short-term investments in the most recent quarter. Long term debt equates to 48% of stockholder’s equity. I like to see companies with long-term debt equating to 50% or less. Year-to-date operating income exceeds interest expense by 55 times. Five or more is considered a decent number.
Starbucks pays a very sustainable dividend. So far this year, Starbucks only paid out 39% of its free cash flow in dividends. Currently, the company pays its shareholders $0.80 per share per year and yields 1.4% annually.
Starbucks’ stock recently went through a correction when it disappointed Wall Street after announcing its Q2 FY 2016 earnings. It currently trades at a 12% discount from its 52-week high. However, Starbucks still trades 34 times earnings versus 24 for the S&P 500. Investors may want to wait for it to correct a little further. Moreover, some less risk adverse investors may purchase shares in small increments. Due to its already high P/E ratio, investors should refrain from purchases if the market turns extremely bullish on the stock.