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Can Anything Stop Starbucks?

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Somebody forgot to tell Starbucks (NASDAQ: SBUX  ) about the weak economy that's been killing retailers this year. With its rivals struggling, the coffee chain made it look easy by logging a 28% bounce in earnings for the quarter that just ended. Sure, a profit of $0.55 a share wasn't the best result that Starbucks has ever notched. It was, however, the second-highest quarterly haul in the company's 42-year history.

Still, what should really have competitors nervous is that Starbucks looks like it's only getting started.

Robust earnings
Comb through the latest earnings report and you'll be hard-pressed to find a weak spot. Starbucks' comparable sales, or comps, grew by 8% globally. Each of the company's sales regions accelerated its growth rate from the prior year. Overall, Starbucks stayed on pace to match its highest annual growth in more than five years. Profitability rose, too, up to a record 16.4% operating margin. Starbucks even boosted comps in the U.S. by a scorching 9%.

This isn't some industrywide trend that the coffee maker is benefiting from. For example, McDonald's (NYSE: MCD  ) pointed to the huge pressures it has seen on consumer spending as a reason sales ticked up by just 1.0% last quarter amid flat operating income in the U.S. Panera Bread reported a disappointing drop in sales growth for the same period as well, and warned of potentially lower profits to come.

Venti-sized growth potential
Starbucks, meanwhile, sees a bright future ahead. It expects to add 1,400 new locations next year as operating profits continue to climb. And revenue will grow by about 10% to 13%, the company says.

I see two big reasons why it can meet that ambitious target. For one, Starbucks has done such a good job with its loyalty program that its customers are sitting on a mountain of prepaid cards. The dollars loaded on Starbucks cards grew by 30% last quarter, which bodes well for customer traffic over the next few quarters.


Foolish bottom line
And two, Starbucks is only beginning to tap into food offerings. The company introduced an expanded bakery menu to about 1,000 of its Pacific Northwest locations, saying it already saw a "substantial lift" in food sales there. Food has been stuck at 19% of Starbucks' revenue for each of the past three years, but its La Boulange menu expansion should change that. Investors can expect sales to get a boost as the rollout hits 2,500 of the company's 7,000 U.S. locations by September, with the rest getting served by the end of next year.

Quarterly reports don't get much better than the one Starbucks just filed. Yes, the stock looks expensive, but that's been true for a while now. My view is that, given the growth potential, 35 times trailing earnings isn't too much to pay for such a solid business.

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Related Tickers

9/30/2016 4:00 PM
SBUX $54.15 Up +0.70 +1.31%
Starbucks CAPS Rating: ****
MCD $115.36 Up +0.57 +0.50%
McDonald's CAPS Rating: ***