Fool on Call: Planet Starbucks

Is Starbucks (Nasdaq: SBUX  ) the best retail stock for 2007? The company made a strong case for itself after kicking off the year with a stirring first quarter. See the numbers for yourself.

In this edition of Fool on Call, we'll use Starbucks' latest quarterly earnings conference call to discuss the company's international efforts, highlighting:

  • International retail growth.
  • Global Starbucks Card and Global Consumer Products.
  • Global growth and global responsibility.

Eight stores per day
In my look at Starbucks' fourth-quarter conference call, I wondered whether the coffeehouse would be able to top its 2006 growth rate of six new unit openings per day by launching seven per day in 2007. I think we have our answer.

For Starbucks sites that have been open for more than a year, the average value per transaction increased by 2%, and the number of transactions increased 4%, for total same-store sales growth of 6%. But the company's top line actually grew by 22%. Where did the remaining growth come from? A record number of store openings generated most the revenue increase in the first quarter.

Starbucks unveiled 728 new stores in the first quarter, 223 of which were in international markets. During the call, CEO Jim Donald broke it down for us: "That's a little over eight stores a day." So much for wondering whether it could open seven.

Donald went on to add, "This number represents the most stores opened during one quarter in Starbucks' history. By the end of the fiscal period, we were serving our customers nearly 44 million times per week at 13,168 locations in 39 countries."

The first Starbucks opened in 1971 in Seattle, but it wasn't until 1996 in Tokyo that it established its first footprint outside North America, just four years after going public. A decade later, it's now in 39 countries, two of which it entered in the latest quarter -- Brazil and Egypt.

Roughly a third of its new store openings in the first quarter came from international markets. We learned in the call that even management is surprised by the level of acceptance its brand has received in certain markets.

For instance, it opened its first location in Mexico just four years ago, and it already has 116 locations there, at a rate of nearly 30 new sites per year. In the Philippines, a region originally estimated to sustain about 25 Starbucks locations, the company has blown away these assumptions with more than 100 stores in operation today. Chairman Howard Schultz asserts, "Experiences like these make us highly confident that we will be able to make our long-term goal of at least 20,000 locations in international markets."

In fiscal 2007, look for Starbucks to enter Moscow and India for the first time as it continues to expand its global footprint. With just 3,767 international sites to date and a target of 20,000 locations down the road, investors have to like the tremendous growth opportunities that await this company.

Other global initiatives
In addition to store expansion, Starbucks has two other major initiatives to drive international growth. During the call, Donald highlighted the company's newest reporting segment, its Global Consumer Products Group (CPG).

CPG consists primarily of packaged coffee and tea, and ready-to-drink coffee products, made available to both domestic and international markets through numerous distribution channels. To give us a sense of how important this segment is to Starbucks, consider that in the U.S. market alone, customers in 2006 bought Starbucks-branded products "approximately 550 million additional times" outside its retail stores.

Currently, its international distribution channel is limited to only four countries, with South Korea and the U.K. the most recent entrants. With a retail presence in 38 international locations, CPG has an opportunity that's easy to see.

Starbucks is also looking to drive growth internationally with its Global Starbucks Card, which will be unveiled next month. A platform was established allowing customers to use the card in the U.S., Canada, Greece, Australia, Thailand, and the U.K., with Hong Kong soon to be added.

In the U.S. market, Starbucks cards have been a huge success, with more than 115 million cards activated since the program's inception five years ago. Management is hopeful that Starbucks will enjoy similar success with its global card. Since these cards generally lead to both increased transactions per customer and increased value per transaction, the company is seeing green with this card. Shareholders should be, too.

With global expansion comes global responsibility
If any company highlights the power of stock-market capitalism, it is this success story. But as many global companies are finding, with success comes increased pressure from the media, environmentalists, and consumer and labor-rights activists, among others, with calls for greater social responsibility. Over the years, global enterprises such as Wal-Mart (NYSE: WMT  ) , Nike (NYSE: NKE  ) , and Gap (NYSE: GPS  ) have received such calls -- and we can add Starbucks to that growing list. Public pressure will come, and rightfully so. The question is how the company will respond.

As I was last quarter, when the company addressed its coffee-procurement plans, I am encouraged that the company took time this call to provide an update on another socially responsive initiative: trans-fat reductions. McDonald's (NYSE: MCD  ) , Wendy's (NYSE: WEN  ) , and a host of other restaurateurs have received intense pressure to remove these oils because of health concerns. A little more than a month ago, Starbucks announced its own intentions to remove trans fats from all of its food offerings by the end of this year.

We learned in the call that in the first quarter, 50% of U.S. company-operated stores introduced zero-gram trans-fat food offerings. The goal is to get this figure to 100%. The U.S. consumer will not be the only beneficiary; Donald states, "In both Canada and China, we expect to see substantial reductions in trans-fat content this year."

It was also highlighted that in February, the company will introduce its second book offering to the public, this one titled A Long Way Gone, author Ishmael Beah's story of his childhood in Sierra Leone, a difficult journey that eventually led him to a UNICEF rehabilitation center.

Starbucks will be donating $2 of every book purchase to the UNICEF fund. When we consider that its first book selection, For One More Day, sold 92,000 copies in January alone, Starbucks' donation to UNICEF will likely be a nice contribution.

A better Starbucks, a better investment
In response to an analyst, Schultz made a remark that no doubt tickles the ear of long-term-minded shareholder: "These are still the early days for the growth and development of Starbucks."

Global growth opportunities abound for this company, but so do the opportunities to continue implementing socially responsible practices. Based on remarks made in the call, Earth-friendly growth -- green growth, if you will -- seems poised to drive shareholder value in the years to come.

Starbucks is a recommendation of the Motley Fool Stock Advisor stock-picking service. Start up a free 30-day trial to learn why.

Wal-Mart is a Motley Fool Inside Value recommendation.

Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.


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