Starbucks continues to grow
As many companies throughout the broader market cut costs and close stores, Starbucks Corporation (NASDAQ:SBUX) plans on opening approximately 3,000 stores over the next four years. It should also be noted that more than half of these stores will be of the drive-thru variety.
One of the key selling points for Starbucks has been its comfortable atmosphere (Wi-Fi included.) Don’t worry; the drive-thru stores won’t act as a replacement to current stores, but as an addition. These drive-thru stores won’t just add convenience for current customers, but also help attract a different market.
As far as revenue, earnings, and same-store growth, all have been impressive. Revenue and earnings have improved for three consecutive years on an annual basis. As far as the last quarter is concerned, revenue increased 11.30%, earnings increased 26%, and same-store sales increased 6%. How has all this been possible?
Starbucks Corporation (NASDAQ:SBUX) is expanding in emerging markets, constantly innovating new beverages and food, acquiring young companies with potential, and penetrating homes with Verismo Machines and Pods, and K-Cup packs. Reduced coffee costs have also helped aid the bottom line. Starbucks management is confident in about the future. FY2013 EPS guidance has been upped to $2.12-$2.18 from $2.06-$2.15. What could possibly go wrong?
Believe it or not, risks exist
Starbucks has been performing well in the United States and Asia. However, Starbucks Corporation (NASDAQ:SBUX) is trading at a lofty 25 times forward earnings, Europe is weak, and the stock’s approximate drop of 50% during the financial crisis of 2008 and 2009 proved that it’s not overly resilient.
The good news is that Starbucks is now more diversified than in 2008 and 2009, and it has penetrated more markets. However, this doesn’t mean Starbucks should act as a safe haven if the market were to suffer a steep correction. It simply means that its business should enjoy more safety than last time around.
That said, those looking for safety should consider McDonald’s Corporation (NYSE:MCD) over Starbucks Corporation (NASDAQ:SBUX). For example, McDonald’s Corporation (NYSE:MCD) dropped approximately 15% during the financial crisis of 2008 and 2009. McDonald’s Corporation (NYSE:MCD) also yields 3.10%, whereas Starbucks yields just 1.30%.
Furthermore, even though caffeine is addictive, it can be found in other places for cheaper prices if necessary. For those of you thinking about Dunkin Brands Group Inc (NASDAQ:DNKN) as a quality defensive play, this isn’t likely to be a good option. It’s a great company with a lot of growth potential as it penetrates the Western United States and emerging markets, and it currently yields 1.80%. But the borrowing it’s done to fuel its growth means Dunkin Brands Group Inc (NASDAQ:DNKN) also sports a debt-to-equity ratio of 5.32.
As far as valuation for Starbucks Corporation (NASDAQ:SBUX) is concerned, Dunkin Brands Group Inc (NASDAQ:DNKN)’s far less of a threat than the overall macroeconomic environment. However, if the U.S. economy can at least show a pulse, then Starbucks should be able to grow enough to meet or exceed expectations.
The bottom line
Starbucks Corporation (NASDAQ:SBUX) is a well-oiled machine. It’s extremely well-run, and it’s going to grow in a traditional sense as well as with its drive-thru stores and in-home coffee. Its strong balance sheet also makes acquisitions more affordable, should the company wish to buy out any additional rivals and further increase its market share.
Despite potential headwinds, Starbucks should remain a good investment. Just keep a sharp eye out for interest rate changes as well as changes in Federal Reserve policy. If interest rates increase too fast, or if Federal Reserve Chairman Ben Bernake begins to unwind monetary stimulus, then investors are likely to flee high-valuation stocks like Starbucks Corporation (NASDAQ:SBUX).
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends McDonald’s and Starbucks. The Motley Fool owns shares of McDonald’s Corporation (NYSE:MCD) and Starbucks Corporation (NASDAQ:SBUX).
The article Is Starbucks Invincible? originally appeared on Fool.com.
Dan 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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