Hot Business
Starbucks seems to be firing on all cylinders now, after revamping its business several years ago. For fiscal 2012, Starbucks’ revenue increased 13.7% driven by increases in comparable store sales and new store openings. Starbucks’ operating income increased 15.6% over the same period. In fact, Starbucks has increased its earnings at an annualized rate of 15.4% over the last five years. Cash flow, a measure that I prefer to use, has increased at an annualized rate of 11.2%.
Starbucks has been very shareholder-friendly when it comes to returning excess cash. The company pays a dividend of $0.84 per year or 1.55% yield. In addition, Starbucks repurchased 11.8 million shares in fiscal 2012 and authorized another 25 million shares for repurchase. With $2 billion cash on its balance sheet and only $550 million in debt, Starbucks has the liquidity to return cash and keep up its growth.
Hot Growth
It’s no secret that China is the holy grail for U.S. based companies looking to grow worldwide. It’s the land of billions and its economy is becoming more consumer-driven. Starbucks has 666 company-operated stores and 2,628 licensed stores in its China/Asia Pacific segment. That seems like a lot until you compare it with Starbucks Corporation (NASDAQ:SBUX) nearly 13,000 stores in the Americas.
In fiscal 2012, revenues increased 31% and comparable store sales increased 15% in the China/Asia Pacific segment. Still, 75% of Starbuck’s revenue came from the Americas, a number that is sure to change as the company massively expands through Asia.
Another key opportunity for Starbuck’s growth comes from what it calls its Channel Development segment. If you’ve ever bought Starbucks coffee from a grocery store, you’ve contributed to the growth of this segment. It includes Starbucks coffee, VIA Ready Brew, Tazo tea, and K-Cups sold outside of the Starbucks retail store.
After ending its distribution partnership with Kraft Foods Group Inc (NASDAQ:KRFT) in 2011, all of the net income from this segment falls to Starbuck’s bottom line. As more people enjoy the Starbucks experience in the stores, they are inclined to bring the experience home. K-Cups accounted for about half of the revenue in Channel Development in 2012. Revenue increased 50% in this segment.
Channel Development is a way for Starbucks to expand growth in already mature markets, such as the United States. Starbucks is putting a tremendous amount of resources in growing the Channel Development segment. As it introduces more ready-to-serve drinks and ways to bring home Starbucks coffee, this segment will continue to explode with growth.
Risks
The biggest risk I see for Starbucks could lie in China. Any major hiccup in its fastest growing segment could stall future growth for the company. These types of incidents certainly aren’t without precedent. Most recently Yum! Brands, Inc. (NYSE:YUM) has seen its growth in China stall out after a food safety scare at its KFC unit. The company has warned that revenue and profits in the country will decline this year. Some Chinese bloggers are even calling for Yum to pull out of the country. These are the types of unforeseen risks that can occur as companies focus on rapid expansion. In addition, any shock to China’s economic recovery could take the steam out Starbucks’ growth.
Starbucks also faces a tremendous amount of competition worldwide. Although there aren’t many companies that can match the consumer experience of Starbucks, there are a lot that sell fresh, hot coffee. McDonald’s Corporation (NYSE:MCD) introduced its premium coffee several years ago and has since expanded into multiple specialty drinks. McDonald’s has been very good at mimicking Starbuck’s success in offering seasonal coffee drinks.
While this may have stolen some growth from Starbucks on the fringe, it doesn’t appear that McDonald’s has encroached too much on the Starbucks experience. Starbucks answered the rise in premium “fast-food” coffee when it bought the Seattle’s Best brand. Seattle’s Best is now sold in fast-food locations such as Burger King Worldwide Inc (NYSE:BKW) and Subway as well as in grocery stores.
The Foolish Bottom Line
Starbucks, though a mature company, hasn’t finished its growth cycle by a long shot. The company has out-innovated other consumer product and retail brands to become a lifestyle company. Starbucks sells great coffee – Yes – but they also sell a great experience.
They are focusing resources toward markets where they are far from saturation. They are also focusing on innovating their product line and distribution in mature markets where it doesn’t make sense to open as many new stores. That focus and innovation is why Starbucks is a core holding for me.
At its current price-to-earnings ratio of 28, shares may be fully valued in the short term. However, in the long term Starbucks has a long runway for growth. That’s why I will be adding to my personal position on any pull-backs. Certainly this is one investors should watch for an opportunity to get in. Until then, just sit back and enjoy a fresh, hot cup of coffee.
The article Starbucks Still Serves Up Hot Growth originally appeared on Fool.com and is written by Frank Constantino.
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