What's Next for Starbucks?

When a start-up becomes an international conglomerate, complete with an iconic brand, its own language, and the ability to turn a paper cup into a status symbol, its founder-CEO runs the risk of becoming a celebrity. After all, there's only so much that's sexy about multi-hyphenated coffee products. But an in-your-face, not-afraid-to-pull-any-punches executive sure of his place in his company and the global marketplace? It all but begs for a movie of the week. And while Starbucks' (Nasdaq: SBUX  ) Howard Schultz has plenty of ideas about how to save America (more on that in a minute), he hasn't let it distract him from continuing to grow his empire.

To coffee... and beyond!
Remember the days when the plethora of Starbucks shops became a punch line in a Christopher Guest movie? Those days of rapid, unmitigated expansion have given way to a more deliberate approach. Starbucks launched two new concept stores in the past three months, both in its hometown of Seattle. In the spring, the company opened a juice bar, and now, it's announced it will open a tea-only shop based on its Tazo line.

Starbucks' former-competitor-turned-underling, Seattle's Best, is also branching out, with a new franchise store in Brooklyn expanding upon a beta store in Chicago. The store will focus on a grab-and-go menu concept designed for commuters.

Unlike Netflix (Nasdaq: NFLX  ) , whose rush to launch a new business model last year resulted in massive backlash and eroded shareholder and customer confidence, Starbucks and Schultz appear to be fans of the beta test. New products are rolled out in small batches, and failed concepts retired. It's the slow-growth approach; one small tea shop doesn't make or break an empire. But of course, the same might have been said about one small coffee shop.

Do whatever Schultz tells you, and everything will be OK
Say what you will about his politics, but you can't doubt Schultz's passion, or what that passion does to sales. His letter this week to citizens everywhere called for impassioned bipartisan debate -- and offered a free coffee to start the discussion. Such free coffee days, which are offered regularly at the mermaid, aren't necessarily the profit-eroder they might seem to be. Have you ever bought a coffee at Starbucks without a pumpkin loaf slice, brownie, or biscotti? If you have, you are a stronger person than I.

From his pledge to end corporate political donations to his earnest attempts to end unemployment, Schultz is the Nicolas Cage of the multinational corporation, everywhere, all the time, with fingers in a lot of small, individually served cobbler pies.

The next six months
While the cool factor can carry Starbucks far (and it has carried it oh-so-far), it's not the only coffee shop on the block. And the past six months have been rocky for shareholders. Since hitting its 52-week high in April, the share price has steadily declined. However, it's still up nearly 30% from this time last year.

To get a sense of what lies ahead for Starbucks, it's important to look past Schultz to the bottom line. At 10%, Starbucks' profit margin is ahead of competitors Caribou Coffee (Nasdaq: CBOU  ) 3.71% and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) 9.48%. (Green Mountain also manufactures the single-serving coffee packs for Starbucks' at-home servings.) Only Tim Hortons (NYSE: THI  ) has a higher profit margin, at 13.34%.

Profit margins are extremely helpful, but a company's debt load also speaks volumes. Starbucks is coming in just shy of $550 million. Green Mountain is on par with $450 million, Tim Hortons with $478 million. Caribou has $0.

Is this good news for shareholders? Well, it depends on what kind of shareholder you are. If you're into companies that use their power for good instead of evil and manage to see returns in the process, then yes. If you're only after a stock that squeezes a profit off every penny, this isn't going to be your favorite pick. Between the free coffee days that are the equivalent of a guy in a park holding a "free hugs" sign, and Schultz's request that customers make a $5 donation to help unemployment (after dropping several dollars on a coffee with more adjectives than a six-grade grammar guide), this is a company that has cultivated the concept of a neighborhood community on a global scale. And like the global community, some days are going to be better than others, economically.

For the second half of 2012, look for more strategic, small-market product rollouts, an expansion of successful beta programs, and Schultz to win the presidential election as a write-in candidate for the Coffee Party. Lattes and scones for everyone.

Starbucks isn't the only company with its eye on the presidential election. Whether you're a Democrat or Republican, you'll want to download our special report: "These Stocks Could Skyrocket After the Presidential Election." Download a copy on us; it's free for Fools.

Molly McCluskey almost started an international incident when she tried to use a Greek Starbucks card in Istanbul. She owns shares, anyway. Follow her travel and finance tweets at @MollyEMcCluskey or on Facebook.

The Motley Fool owns shares of Netflix, Starbucks, and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended buying shares of Starbucks, Netflix, and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters and writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1935197, ~/Articles/ArticleHandler.aspx, 9/30/2014 8:19:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement