Starbucks Keeps Growing

Starbucks (Nasdaq: SBUX  ) is nearing new highs after reporting one of the strongest years in its 12-year public history. Sales for the year ended Sept. 28, 2003 rose 24% to $4.1 billion, while same-store sales at locations open at least 13 months increased 8%.

For 12 consecutive years, the coffee chain has grown same-store sales at least 5% annually, a feat much more difficult than it sounds. Adding hundreds of new stores per year obviously grows the company, but investors focus on same-store sales as an indicator of lasting growth potential.

New stores typically open to fanfare and then find a steady groove, so management is measured on its ability to increase sales at stores that have been open long enough to lose their novelty. And there Starbucks shines.

This year's 8% increase topped last year's already strong 6% gain, and during the last five weeks (ended Sept. 28) same-store sales increased 9% on a 25% gain in revenue, so the company is entering the holiday season with strong momentum.

Driving sales higher are new drinks -- the company strives to invent several every year, typically a few each season -- as well as the Starbucks store card, a purchasing card that pays the company in advance and speeds lines at the cash register.

In the 52 weeks ended Sept. 28, Starbucks opened 858 new stores in North America, bringing the total to 5,570; it opened 343 new international stores, bringing those to 1,655; there are now 7,225 Starbucks locations worldwide. The majority of domestic stores are Starbucks-owned, while a majority of international stores are licensed to local partners. Last week, Starbucks announced it would open its first location in France in 2004.

The company generated considerable free cash flow even as it expanded its store base by about 20% this year, and the pace of new store openings is not slowing. Starbucks is expected to grow earnings per share 22.5% in the new year just started, and the $30 stock trades at 35 times that forward estimate.

The stock is priced for perfection, but the premium seems justifiable given Starbucks' dominance and track record. The company could very well be throwing off increasing cash to shareholders for decades to come.

On Nov. 13, the coffee giant reports full fourth-quarter and year-end results. Consensus estimates currently see earnings of $0.17 per share.


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