Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



What Starbucks' $2.8 Billion Hit Means for Investors

An arbitrator slapped Starbucks (NASDAQ: SBUX  ) with a $2.76 billion fine on Tuesday, ending a three-year dispute between the java giant and the pre-split Kraft Foods. The ruling comes after a long-running clash between the companies, which began in 2010, when Starbucks terminated an agreement with Kraft for distribution of Starbucks-branded products in grocery stores. At the time, Starbucks had offered to pay Kraft $750 million to end their partnership -- an offer Kraft turned down. 

Starbucks now has to pay billions, and restate fiscal fourth-quarter earnings. Let's look at the implications this has for the coffee chain and its shareholders.

To Mondelez go the spoils
Mondelez International  (NASDAQ: MDLZ  )  shareholders are the real winners here. Kraft spun off its North American grocery business last year, and changed its name to Mondelez, which means the windfall of cash from the arbitration will go to Mondelez. The snack company plans to use the proceeds to reward shareholders with share buybacks.

The ruling orders Starbucks to pay $2.23 billion in damages to Mondelez, and $527 million in legal fees. As a result, Starbucks must restate its fiscal fourth-quarter earnings. Based on an 8-K form the company filed on Wednesday, Starbucks now shows a loss of $1.64 per share for its fourth quarter, ended Sept. 29. However, the company should still be able to maintain its guidance for fiscal 2014 earnings in the range of $2.35 to $2.65 per share, thanks to its solid balance sheet and ability to generate strong cash flow.

Why this is good for shareholders
During the call with investors today, Starbucks CEO Howard Schultz emphasized how this one-time charge to Mondelez gives Starbucks full operating control of its multibillion-dollar global consumer packaged-goods business. Schultz pointed to the future opportunity this creates for Starbucks to build a "one-of-a-kind CPG business" that is fully integrated into the company's retail business.

One way to look at this is as an M&A cost. Starbucks is essentially acquiring its packaged coffee business from Kraft in a deal that will create long-term value for Starbucks investors. Ultimately, this is in the best interest of its shareholders.

In fact, Starbucks has gained the leading market share of premium-packaged coffee since taking back control from Kraft in 2011. Not to mention, sales in this segment increased 62% during that time. Starbucks'  global channel development is now the company's second largest operating segment -- a feat that wouldn't have been possible with Kraft playing the middleman. Going forward, management is confident that it can achieve double-digit top-line and bottom-line growth in this segment under the direct model.

Growth you can't afford to miss
Despite this costly one-time charge, Starbucks is still on track to achieve record growth in the years to come.

But it isn't the only growth stock that will reward investors in the quarters ahead. And finding truly wealth-changing stocks doesn't need to be challenging. Now you can unlock six of The Motley Fool's top stock picks for ultimate growth in this free report: "6 Picks for Ultimate Growth." Stop settling for index-hugging gains... and click HERE for instant access to a whole new game plan of stock picks to help power your portfolio -- it's free today. 

Read/Post Comments (0) | Recommend This Article (5)

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.

Compare Brokers

Fool Disclosure

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: 2725145, ~/Articles/ArticleHandler.aspx, 9/27/2016 11:47:14 AM

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...

Today's Market

updated Moments ago Sponsored by:
DOW 18,179.10 84.27 0.47%
S&P 500 2,154.58 8.48 0.40%
NASD 5,289.47 31.98 0.61%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 11:31 AM
MDLZ $43.03 Up +0.31 +0.73%
Mondelez Internati… CAPS Rating: ****
SBUX $54.02 Down -0.02 -0.04%
Starbucks CAPS Rating: ****