Lattes and cappuccinos aren’t the drinks of economic struggles. As consumers tighten their purse strings, the once-a-day latte fix is often the first thing to go.
That’s why the recent performance of Starbucks Corp. (ticker: SBUX) — up 39 percent in the past year — has optimists hopeful that the hiccups in the market are only short term. But there’s far more to Starbucks than simply coffee.
Through efforts in food, supplying grocery store aisles and international expansion, Starbucks has become a coffee conglomerate. “It’s one of the more dynamic stories in the broader consumer space,” says RJ Hottovy, an analyst for Morningstar, the Chicago-based ratings and data firm.
Starbucks has transitioned from a coffee shop into one of the stronger growth companies in the consumer space. But lingering questions remain: Is Starbucks doing too much all at once? And will its efforts take hold?
Food has become a growth driver. In 2014, Starbucks made a commitment to double sales of food items in its coffee shops over five years by increasing its focus on lunch and dinner.
While it is starting to see that effort come to fruition, Starbucks’ menu items got off to a slow start because it had “no credibility around the brand,” says Nick Setyan, senior vice president of equity research for Wedbush Securities in Los Angeles.
Fortunately for the company, Starbucks purchased a San Francisco bakery chain, La Boulange, in 2012. It closed the chain in 2015 because it was unable to take the brand national — but it’s now using the recipes in Starbucks stores, increasing the quality and quantity of its food offerings. “La Boulange was a genius transaction,” Setyan says. “It gave them credibility.”
The other force behind food’s growth — which now accounts for around 20 percent of Starbucks’ revenues — is the company’s increased use in mobile tools, particularly from its smartphone app. Starbucks has long been on the leading edge of consumer interaction, offering discounts and nudging customers to encourage repeat visits to its stores.
Food sales at Starbucks were up almost 20 percent from a year ago in its most recent quarterly earnings, providing a nice boost for SBUX stock.
K-cups offer great margins. Individual servings of pre-packaged coffee offer Starbucks an opportunity to achieve something retail stores can’t: great margins. The consumer packaged goods division makes up 8 percent of Starbucks’ total revenues, driven by the 40 percent margins on its single-serving coffee sold in K-cups, Hottovy says. Retail stores can expect only a 20 percent return on coffee sales, he says.
Starbucks is gaining market share against K-cup originator Keurig Green Mountain (GMCR), increasing sales by 22 percent in the past two years. Keurig was bought out in December by a private company, JAB Holding Co., and will go private — a move that may make the company more conservative in growth, Setyan says. That could give Starbucks an even better opportunity to expand its market share.
But Starbucks isn’t just sticking to expand in the grocery aisle. It’s also stepping up efforts of its Teavana subsidiary that it purchased in 2012. While the tea stores account for only a small percentage of Starbucks’ 9 percent same-store sales growth in the U.S., Teavana is among Starbucks’ fastest-growing brands.
China’s growth has a buffer. There are concerns among analysts that the Chinese economy has finally hit a wall, now that its gross domestic product grew only 6.8 percent in the fourth quarter of 2015 — still staggeringly good by most standards, but a drop for China — and the stock market is riding a wild wave. Starbucks has 2,000 shops in China and plans to reach 3,400 stores by 2019.
“Those stores are doing double of profitability and return on investment than the U.S.,” Setyan says. “Even if tomorrow sales would collapse by half, it would still be as successful as the U.S.”
Part of the reason Starbucks seems safe from China’s struggle is because Beijing is transitioning from a manufacturing economy to a consumer-based economy. This has led to macroeconomic struggles, but consumer companies such as Starbucks can benefit from the change.
“They were the ones to define what it means to drink coffee in the U.S.,” Setyan says. “They can define the coffee culture in China.”
SBUX stock may be worth the price. One overarching cause for trepidation that investors should worry about is whether Starbucks has too much on its plate. “The largest concern is: ‘Are you juggling too many things at once?'” Morningstar’s Hottovy says. “There are a lot of balls in the air.”
But Hottovy believes that the company has hired the right talent to manage the various initiatives, which allows Starbucks to move forward at breakneck speed.
The other concern is that Starbucks stock is expensive. With a price-to-earnings ratio of 37, SBUX stock has a ratio 17 percent higher than its peers. But Starbucks plans to increase its stores by 7,000 to 30,000 globally by 2019, pushing revenues from $19 billion in 2015 to $30 billion by 2019. That would ease some investors’ fears.
With these clear targets and strong strategies to reach the benchmarks, Setyan has no problem estimating that SBUX stock will reach $70 per share — a 14 percent increase from its price.
More from U.S. News
12 Tips for Investors in Their 50s and 60s
8 Stocks to Buy for a Great 2016
16 Things Investors Should Know About Crowdfunding
Starbucks: 4 Things To Know About SBUX Stock originally appeared on usnews.com
