1 Retailer With Strong Growth Prospects

Get ready to notice a lot more Starbucks (NASDAQ: SBUX  ) locations around.

The company just updated investors on its expansion plans in the U.S., which call for an aggressive buildout of 1,500 new stores over the next five years. That includes 300 additional cafes to be added this year alone.

But with over 10,000 stores in the U.S. already, the obvious concern is whether there's room enough in the market for all of those extra coffee shops. I see two good reasons to think that there is.

First, Starbucks is enjoying healthy revenue growth in its existing locations. The company just reported 7% higher comparable sales in the U.S. last quarter. That was on top of a scorching 9% rise in the year-ago quarter. Starbucks trounced the 0.3% growth that McDonald's (NYSE: MCD  ) managed in this past Q4. And it clocked almost double the 3.8% that Chipotle (NYSE: CMG  ) expects to see. Both Chipotle and McDonald's have a large base of high-traffic locations in the U.S. already. Yet McDonald's plans to keep adding to its 14,000 domestic store footprint. And Chipotle sees more room to grow too, at a pace of about 170 new restaurants in 2013. In comparison, Starbucks' growth plan looks aggressive, but equal to the outsize opportunity.

And second, Starbucks is focusing on the smaller, cheaper, drive-through format to power its expansion plans. More than half of the company's 1,500 new U.S. cafes will be drive-through locations. As McDonald's has shown, that format is an efficient way to handle massive customer traffic. That's why the company focuses its capital investments on adding drive-through capability wherever it can. As Mickey D's explains in financial filings, it helps "capture additional guest counts."

But there's another reason for Starbucks to lean on drive-through locations for growth: They're much more profitable. The drive-through spots only account for about a third of all stores in the U.S. right now, but they kick in almost 45% of total retail profits.

Given that earnings potential, and the revenue opportunity ahead in the U.S., it's no wonder that Starbucks shares sport a premium valuation of 30 times earnings. The company is looking at some of the most promising retail prospects around.

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  • Report this Comment On January 31, 2013, at 1:46 AM, BuildOnRandy wrote:

    Great idea on the drivethrough! Now if we could drive those 4 hour squatters playing on their mobile tinker toys through a bit faster, your money would really grow! I ofter have to leave a variety of locations because all seats are taken by squatters who buy one coffee and sit for hours ... humbug!

  • Report this Comment On January 31, 2013, at 8:47 AM, TMFSigma wrote:

    @buildonRandy - you said it! drive through must triple the company's turnover, easily. Kind of hard to linger over your coffee when someone is honking at you from behind.

    -Demitri

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