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Starbucks (Nasdaq: SBUX ) kicked off the holiday season by doing some major shopping of its own. The company, which launched its red-cup holiday specials this week, also announced the purchase of tea shop Teavana (NYSE: TEA ) in a deal valued at more than $600 million, Starbucks' biggest buy yet.
That splurge follows a host of recent moves aimed at expanding the company's business beyond espresso drinks. Starbucks jumped into the juice market when it bought Evolution Fresh, and then dipped into the bakery business by snapping up the La Boulange brand. And most recently the company muscled into the retail channel, taking on Green Mountain Coffee Roasters (Nasdaq: GMCR ) with its own single-cup home coffeemaker, the Verismo. Those were all big strategic moves for Starbucks, but this latest one takes the (coffee) cake.
As big as water?
Despite Teavana's small footprint -- it runs just nearly 300 stores confined to shopping malls -- Starbucks has major plans for those shops, and for the brand. For starters, the company expects to build Teavana out from its mall focus and add a "high-profile neighborhood store concept," with a lot of the hallmarks of the Starbucks locations. But over time the coffee giant wants to use the Teavana assets for a much bigger goal: to "pioneer a new retail experience" for tea.
And on the tea drink itself, management is about as bullish as you can be. CEO Howard Schultz pointed out to The Wall Street Journal that tea is "the second most consumed beverage in the world after water." Schultz went a bit further in the company's news release, saying "the Teavana acquisition now positions us to disrupt and lead, just as we did with espresso starting three decades ago." Reading those two statements together, it's clear that Starbucks isn't looking at this acquisition as just a grab for incrementally higher growth. The company wants to change consumers' drinking habits, again.
Starbucks is right to highlight the huge addressable market. And there are loads of potential benefits to the company in a push into tea. The immediate advantage will come domestically, where Starbucks could start offering Teavana products in its stores. After that, the company can look forward to growing sales contributions from Teavana's locations as they bring those shops closer to Starbucks' average store revenue figures. But the long-term potential looks best internationally, in markets like India and China, where coffee drinkers are well outnumbered by their tea-sipping friends.
The $600 million-plus purchase won't be a drag on the company's financials. Starbucks will have no problem finding the cash for the purchase. At last count, the company reported over $1 billion in cash and equivalents sitting on the books. And as for profits, the company expects the merger to quickly begin contributing to earnings, helping 2013's profits by about $0.01per share.
Choose your flavor
The major risk here is that of diluting Starbucks' focus. All of these product expansions -- from pastries to juices to coffeemakers -- bring to mind some of the ill-fated initiatives that Schultz canceled when he returned as CEO under the charge of going "back to basics." Part of the strategy to save the then-struggling retailer involved cutting out things, like breakfast sandwiches, that were detracting from the Starbucks coffee experience. Who's to say that any of these new expansions won't be another distraction that the company ends up cutting loose down the line?
The other main concern is what this purchase signals about that coffee business; that maybe growth in Starbucks' core market going forward won't be as robust. But for an answer to that worry, just look at the company's latest results.
Starbucks reported strong comparable sales growth in the U.S., of 7%. The company closed the books on an impressive year of physical growth, too, by opening over 1,000 new stores globally. And Starbucks doubled down on plans to accelerate that growth, aiming to open about 600 new stores in the U.S. and 700 more around the world next year.
Unless the company starts ratcheting back those figures, there's no reason to think Starbucks is anywhere near market saturation. So, heading into the holiday season, the company is still one of the best positioned retailers around.
Green Mountain may be another story. With the company as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling, or the perfect entry point for an enormous rebound. You can find our recommendation for how to play the company in our new premium research report. In it you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices. Click here for instant access.