Did Starbucks Just Have Its Best Year of All Time?

On Starbucks' (NASDAQ: SBUX  ) fourth-quarter earnings call, all anyone wanted to know about is how La Boulange pastries, now present in 3,500 stores, are affecting comparable-sales growth. At one point, CEO Howard Schultz tried to clear things up as much as possible regarding the company's comparable-sales guidance. He said it would be irresponsible to guide comparable sales similar to the third and fourth quarters, where the company saw growth of 9% and 8%, respectively, in the U.S. year over year.

Overall, I got the feeling that analysts were trying to poke holes in growth initiatives, and trying to craft the story that Starbucks just had its best year of all time -- of all time!

I think these spreadsheet warriors are focusing on the wrong things. Even if the company can't produce same-store-sales growth on par with its last two blowout quarters, there are plenty of growth opportunities for Starbucks.

Can it keep this up?
That's not to say Starbucks is incapable of driving high-single-digit same-store sales. Schultz iterated that "many of us think we can [reach those numbers] but we're not going to sit here and put a number out there that is such a stretch target and have you put it in your model."

Most of the company's same-store sales growth has come from increased traffic. Each Starbucks store brought in an average of 591 customers per day in 2013. Research firm Trefis believes Starbucks locations can continue increasing average traffic at a rate of about 6% per year through 2020.

Starbucks' investments in technology and new products appear to be paying off. 11% of in-store purchases were made with smartphones last quarter, which speeds up the queue. La Boulange pastries may be a continued traffic driver as the company plans on rolling out their availability to all company-operated stores by the end of 2014.

La Boulange was a particular focus of analysts on the conference call, but instead of focusing on the dayparts the brand opens up for Starbucks stores, all analysts could focus on is incremental price and sales of pastries. La Boulange will drive traffic to Starbucks past the morning, as it has real potential to become a lunchtime alternative to fast-casual restaurants.

As traffic grows, not only do same-store-sales grow, so do operating margins. There's still plenty of operating leverage left in Starbucks' brick-and-mortar units, and increasing traffic in dayparts outside of morning will utilize that leverage.

Outside of stores
Starbucks continues to grow its consumer packaged goods division. In the areas it operates, CPG made up a higher percentage of sales than ever before. Although the company sells CPG primarily in its Americas segment, Starbucks has plans to double the division's international footprint over the next two to three years.

Partnerships with Whole Foods Market (NASDAQ: WFM  ) , which has agreed to carry Starbucks' Evolution Fresh and Evolution Harvest product lines nationwide, and Green Mountain Coffee Roasters (UNKNOWN: GMCR.DL  ) , will continue to propel growth in this category.

Whole Foods has a long runway ahead of it, with plans of opening 1,000 total locations. Currently, the company operates just 365 stores. The grocer's store-brand entry into the $1.6 billion cold-pressed juice market is a great sign that the market is expanding and Whole Foods is the place to find customers.

Starbucks renewed its partnership with Green Mountain earlier this year, and thus far has taken full advantage. Starbucks improved its K-Cup sales 42% in the fourth quarter as it expands its selection in the category.

One thing that excites me is the potential for Starbucks to bring its Teavana brand to either Whole Foods or Green Mountain. Currently, there are a limited number of K-Cups with Teavana branding, but Starbucks should be able to take advantage of Green Mountain's Vue system, which allows for temperature control. Additionally, Teavana teas would fit nicely in Whole Foods' loose tea section.

Oh, and the company still sells a bunch of coffee in grocery aisles.

A not-so-smooth finish
The analyst Q&A was tough to listen to last week. It seemed like the analysts couldn't get the idea out of their minds that Starbucks had peaked. Instead of focusing on the positives and the potential of Starbucks brands like La Boulange, Evolution Fresh, and Teavana, they just wanted to know if same-store sales can continue growing at the same pace as the last two quarters.

This is the second quarter in a row that CEO Howard Schultz has said it would be irresponsible to guide comparable sales to match the most recent quarterly results. That pattern could continue, but if it doesn't, there are plenty of other opportunities outside of stores.

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  • Report this Comment On November 06, 2013, at 3:14 AM, OldWing wrote:

    Since its IPO, Starbucks, while under Schultz's leadership, has followed an exacting business model and, most importantly from the customer standpoint, has been consistent in their image, their product and has built upon success one cup at a time. For over 15 years I have used Starbucks as a training tool to employees. I always remember "Winners go with winners".

    This credo applies to investors, employees and especially to customers. -OldWing

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