Fool on Call: Starbucks Keeps Sprouting

These are interesting times for Starbucks (Nasdaq: SBUX  ) . So declared my Foolish colleague Alyce Lomax while poring over the coffee specialists' latest financial results. Happily, the company's challenging fourth quarter had little to do with mounting competition from the likes of Caribou (Nasdaq: CBOU  ) , Dunkin Donuts, Tim Hortons (NYSE: THI  ) , PaneraBread (Nasdaq: PNRA  ) , and KrispyKreme (NYSE: KKD  ) . Instead, the decline in earnings was a reflection of accounting changes to include stock-based compensation.

Revenue growth, on the other hand, remains solid, increasing 21% in the latest period. To keep its top-line momentum going, Starbucks took significant time during the fourth-quarter conference call outlining its growth strategy for 2007 and beyond.

In this Fool on Call, we'll use Starbucks' conference call to highlight the following growth initiatives:

  • Store expansion
  • Product development
  • Socially and environmentally friendly coffee purchases

40,000 Starbucks?
Store expansion is a key growth strategy for Starbucks. In FY 2006, management targeted unit growth of 1,800 -- a remarkable number for any retailer -- and blasted that target to bits, opening 2,199 new stores this past fiscal year. In the conference call, CEO Jim Donald broke the figure down, highlighting that it "equates to an average of six new stores per day," representing 30% year-over-year unit growth. Wow!

Can Starbucks open seven new units per day in FY 2007? It's possible. Management is calling for 2,400 additional stores in the upcoming year, and considering that demand (as well as its efficient store-development model) remains intact, don't be surprised if this target is also surpassed.

Donald assured investors that Starbucks continues to see "tremendous opportunity" in both domestic and international markets. Using current data, management estimates that the overall market can sustain 40,000 Starbucks sites. If it can achieve such a footprint, it would attain a global presence matched only by McDonald's (NYSE: MCD  ) . In fiscal 2006, Starbucks operated 12,440 units, suggesting that it is still very much a growth story.

A sandwich with that latte?
In addition to store expansion, increasing sales in units that have been open for more than a year are also important to any healthy, growing retailer. During the past year, Starbucks saw a strong 7% same-store sales increase. Brisk customer traffic resulted in a 5% rise in transactions, while the average ticket amount increased 2%. Product innovation continues to drive comps.

Donald indicated that the "Starbucks experience continues to be universally relevant and accepted." The company is making strides to broaden its product offerings, appealing to more of the masses with initiatives like its push to offer more food options. Donald affirmed that food is a "growing part" of the Starbucks biz.

Initiatives made in the fourth quarter should continue well into FY 2007. These include the introduction of more low-fat items for its bakery, as well as the expansion of grab-and-go lunches and its warm breakfast sandwich program into additional stores. To date, lunch items are available in 67% of its U.S. company-operated locations and 70% of Canadian company-operated sites, while breakfast sandwiches are only in 1,000 locations.

Obviously, further broadening the reach of its lunch and breakfast offerings will be a significant part of Starbucks' efforts in 2007. The addition of breakfast sandwiches alone equates to roughly $35,000 additional annual sales in each new store. To take advantage of this opportunity, Starbucks is aggressively rolling out breakfast items in at least 2,400 more stores in FY 2007.

You can bet that places like Panera Bread and Cosi are none too pleased to see Starbucks expand into food. Starbucks is wise to make the move; by selling food to complement its core coffee biz, it strengthens its defenses against other concepts that sell coffee to complement core food offerings.

Socially responsible coffee purchases
We've now highlighted two core growth strategies for Starbucks: unit growth and product innovation. But during the conference call, Donald thought it worthwhile to highlight another very important part of its sustainable growth strategy -- environmentally and socially responsible coffee purchases. As a big believer that socially responsible initiatives among corporations provide excellent fuel for long-term growth, I'm glad to see Starbucks take time during the call to address this topic.

In FY 2006, the company set a goal to purchase 150 million pounds of coffee grown in a socially and environmentally responsible (SER) manner. "I'm very pleased to report that we surpassed that goal and will continue our work in this area," Donald stated proudly. Look for Starbucks to secure 225 million pounds of SER coffee in FY 2007.

Coffee is the core of Starbucks' business, and for it to remain as such, it is important that the company take steps today to secure its business for tomorrow. Assuring that the coffee it acquires is grown in a manner that is sustainable for the long haul, embracing both socially and environmentally responsible production, is an excellent decision.

Starbucks is still a growth story
In 2007, Starbucks will continue to ramp up store growth, expand its product offerings, and increase the amount of coffee purchased from socially and environmentally responsible growers. All three are important pieces of its sustainable long-term growth strategy.

Given the company's track record, one has to conclude that its ambitious growth plan, built on sustainability, will likely lead to a market-beating investment for long-term-minded shareholders.

Related Foolishness:

Starbucks is aMotley Fool Stock Advisorrecommendation, while Krispy Kreme was a former pick of the service. To find out what other companies David and Tom Gardner have recommended to subscribers, check out a 30-day free trial.

Fool contributor Jeremy MacNealy has a player rating of 97.93 and is ranked 285th out of 13,729 participants at Motley Fool CAPS, the Fool's new stock-rating service that's open everyone. He has no financial interest in any company mentioned. The Motley Fool has a nifty disclosure policy.


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