- Starbucks still manages to expand, which is amazing for a company of its size.
- Starbucks’ product innovation helps bring customers back through the door of its restaurants and to buy its products at grocery stores.
- Starbucks sports rock solid fundamentals translating into superior gains for shareholders over the past five years.
When thinking long-term its best to think like business owners. After all, owning stock means you become part owner of a business. As a business owner you want your business to expand, sell products and provide experiences to customers that are relatively unique. With that said, let’s take a look at a beverage house and retail supplier Starbucks (NASDAQ:SBUX).
Still expanding after all of these years
Starbucks was founded nearly 45 years ago and has grown into a ubiquitous company with a presence in 68 countries. Yet, the company still manages to expand. On Sept. 27, Starbucks ended its FY 2015 with a little over 23,000 company and licensed locations. Starbucks opened a total of 1,677 stores in FY 2015, representing an 8% increase over the previous year. This represents quite a high rate for a company of this size.
Starbucks not only increased its footprint, but has demonstrated an ability to get its customers back through its doors at established locations. In FY 2015, same stores sales increased 7% with a 3% expansion in traffic. This gives indication that Starbucks knows how to bring customers through the door. In its most recent earnings announcement, management asserted “72 million more customer occasions from its global store base” in FY 2015 versus FY 2014.
Innovation rules at Starbucks
Starbucks loves to invent new products. One example, includes the Evolution Fresh Greek Yogurts, which represents a combination of Starbucks’ Evolution Fresh juices and Danone (OTC:DANOY) Dannon Yogurt. Products such as these give Starbucks a chance to expand its presence in the grocery store arena and enhance its consumer packaged goods (CPG) business in the process. This segment expanded its revenue 12%, year-over-year, in FY 2015.
While Starbucks constantly invents new products to keep consumers interested, it sometimes removes old products such as the Valencia Orange to make room for new products. While it’s reasonable to assume that Starbucks will rotate holiday products, removing permanent products that consumers grow to love and enjoy could prove detrimental in customer relationships.
Starbucks ability to expand and draw customers in by creating and selling products that they love translated into superior fundamental expansion. Over the past five years, Starbucks grew its revenue, net income and free cash flow 79%, 191% and 93% based on figures provided by Morningstar.
Starbucks possesses an excellent balance sheet. Starbucks ended FY 2015 with $1.6 billion in cash and investments, which equated to a respectable 28% of stockholder’s equity. Starbucks keeps its long-term debt under control. Its long-term debt amounted to only 40% of stockholder’s equity. Operating income exceeded interest expense by a solid 51 times in FY 2015.
Starbucks’ excellent fundamentals translated into superior share gains for its investors over the past five years (see chart below). Its share price advanced 302% versus 74% for the S&P 500.
Exercises prudence in paying a dividend
Starbucks also pays a dividend, firmly supported by its free cash flow. Investors should look for companies that pay out less than 50% of their free cash flow in dividends. In FY 2015, Starbucks paid out 38% of its free cash flow in dividends. The company currently pays its shareholders $0.64 per share per year and yields 1.3% annually, which isn’t bad for an expanding company.
Of course, Wall Street fully appreciates Starbucks’ financial success. The company’s valuation is approaching a five year high when factoring out extraordinary items in FY 2013 (see chart below). Starbucks’ P/E clocks in at around 34 versus 19 for the S&P 500, which also resides close to a five year peak. Starbucks comes with a great deal of market price risk.
The financials of Starbucks are quite compelling and driven by a popular and dynamic product line. However, investors should note the pricey valuation that comes with Starbucks stock. Starbucks stock is overvalued in an expensive market overall. Investors who feel compelled to buy may want to take a small position, while adding during market downturns.