To Start Off:
Starbucks
(NASDAQ:SBUX), has always been considered a haven for the upper-middle class.
The conversational trendy atmosphere has separated itself from other
competitors in terms of what it has to offer. Recently Starbucks has turned to alternative ventures almost steering away
from its traditional business model while maintaining its originality.
Image credit: deanpictures / 123RF Stock Photo
International Growth:
What are the goals and outlook for Starbucks
at this point? Right now the company is looking to expand into China which
should serve as the company's most profitable international market.
Starbucks is trying to draw customers to buy
complementary products. Starbucks has expanded into the tea business, they are
also starting to sell alcohol.
Starbucks has close to 13,000 US stores. It
has been expected that sales will slow domestically, however, its 20,000
international stores should make up the difference.
Starbucks plans to open around 750 new stores
in China within 2014. The company also expects to open additional locations in
India. The expansion into these two countries alone could provide a large
positive influence on the earnings for Starbucks. Starbucks has seen 30% year over year
revenue increases in China. While China is typically known for its tea drinking,
it was apparently able to make the transition. Perhaps looking to open Teavana
in China will be Starbuck’s next venture.
Starbucks continues to use focus on its core
coffee and food products while also trying to cater to the Chinese culture.
Retail coffee sales have increased 10%, which is 7% above the global average. A
major question is whether coffee will ever replace tea in China. This was previously
an issue with MCD. Remove burgers
and fries replace the traditional agricultural rice dominated diet of the
eastern culture. Given MCD’s apparent success in the region, I don’t believe
Starbucks will have any trouble fitting in either.
New Ventures:
Teavana
Acquisition
The global
tea market has reached close to 90 billion over the last year and Starbucks is
looking to take advantage with the acquisition of Teavana. Starbucks hopes to start
over 1000 Tevena stores within the next 10 years in North America.
Mobile App
Starbucks are
starting to use mobile payments as a alternative for consumers to purchase
products before entering the store. Customers will be able to tip using the
mobile app. Currently 1 in 10 purchases at Starbucks are made with a mobile
device.
Starbucks is
trying to get people to sign up for its mobile app which should increase
visitors to the store. This is an essential part of Starbucks future given the
demographics. It is surprising this wasn’t an option sooner.
Alcohol
Venture
Starbucks
has recently introduced new alcoholic beverages to its menu, in hopes of
drawing more customers during evening hours. According to CEO Howard Schultz
the average Starbucks customer spends about 5 dollars per visit. He believes,
with the introduction of alcoholic beverages, this number can double. There are
questions as to whether the alcoholic beverages will alienate the current
customer base. How many customers will actually choose Starbucks for a drink
after work?
Competition
Starbucks
Peg of around 1.45 certainly looks cheaper than its competitors such as MCD at
2.16 or Yum, (NYSE:YUM) at around 1.70. It may be safe to assume that Starbucks
international ventures along with its innovative mobile ideas and product expansion
will allow its growth to remain at high enough rate. However, its low dividend
payout may be a reason to keep it out of your long term portfolio.
YUM brands
has seen recent success in earnings abroad especially in China which makes up
about 40% of its market share. However, it has seen struggles with returns from
the same store sales which have gone down around 4%, which is still an
improvement from what was seen a few months ago. China represents around
one-third of YUM’s total operating income.
At this time,
it looks as though Starbucks is going to continue its aggressive growth strategy in hopes of gaining additional market share internationally.
Increased
Coffee prices according to Forbes.com shouldn’t have an impact on Starbucks at
this point because they have already bought most of their inventory and locked
in the low prices. However, Green Mountain Coffee (NASDAQ:GMCR) may have some
difficulties in the upcoming months. Green Mountain’s commodities cost totaled
about 62% of their revenues. A spike in prices could be significantly affecting
margins moving forward. Green Mountain has purchased approximately 3 month
worth of coffee supply which may not carry out the coffee spike.
As the
numbers indicate, Starbucks manages to keep its debt to equity low while also
keeping a reasonable number of liquid assets on hand. Even though both numbers
fall short of industry averages. The company’s current ratio of 1.27 is almost
even with the industry average of 1.29 and the total debt to equity ratio is 41.90
compared to an industry standard of 62.52. Most of this debt seems to be short
term, which may or may not be beneficial, given the current interest rate
environment.
Technical Analysis
The company
looks to have a strong support at $70 dollars. With analyst projections closer
to $90-$92, it may be wise to wait for a pullback and allowing market risk to
take its course considering SBUX beta of 1.16. However, once the stock does
push past $80 staying long is the best option.
Sources:
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