Starbucks: 5 Key Growth Rates to Watch

Starbucks is delivering impressive revenue growth for a company its size. Can the company sustain its top-line momentum?

Jan 16, 2014 at 6:00PM
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"Approximate Corrugated Symmetry" courtesy theilr on Flickr.

Starbucks(NASDAQ:SBUX) dark green stylized mermaid logo, perhaps initially scrutinized for its mythic qualities by first-time customers around the world, quickly becomes an unnoticed afterthought for regular patrons. Those who observe the company's corporate performance may have similarly become habituated to its rapid and consistent revenue growth. Over the last four fiscal years, Starbucks has posted a compounded annual growth rate, or CAGR, of 11.1% -- momentum that deserves clear praise given the company's size. If this growth rate continues, in three short years the global coffee purveyor's annual revenue will jump from $14.9 billion to nearly $20 billion.

Investors may worry about Starbucks' ability to continue to develop its top line. How do you grasp a mature company's prospects for multiplying sales? One method is to gauge key financial and nonfinancial growth rates that affect overall revenue -- understanding these can help you determine whether a company's growth is rising or tapering. Let's zero in on five key areas that will affect Starbucks' revenue in the near future.

Licensing
Starbucks is increasingly opening licensed locations in shopping malls, grocery stores, airports, and other noncore formats as a way to expand its reach. Last year, revenue from licensed stores expanded at a rate of 12.4%. In the company's China/Asia-Pacific segment and other fast-growing markets, licensing is often a preferred strategy, as partners on the ground are better equipped to navigate local regulations and supply chains. Starbucks has recently mentioned its "increased focus on international licensed stores" in SEC filings.

Licensing is also advantageous because it generates revenue with lower associated costs than company-operated stores. The flip side of this advantage is that it takes many more licensed stores to equal the revenue of a single company-operated location. Starbucks now has nearly as many licensed stores as corporate stores (roughly 9,600 licensed versus 10,200 company-operated), but licensing accounts for only 9% of total revenue. However, look for licensed revenue to increase in both the rate at which it's expanding and its share of total company revenue in the years to come, as Starbucks uses licensed stores to quickly spread its brand in emerging markets.

Deferred revenue
Here's an interesting question to ponder: When does a company trumpet the unbridled growth of a current liability? When the company is Starbucks, and it's discussing deferred revenue from newly loaded loyalty cards, it's acceptable to be proud of the liability on quarterly earnings conference calls.

When a customer loads a Starbucks loyalty card, the cash goes into Starbucks' coffers, and the company records a liability against the same amount, transferring portions of the liability to earnings as the card is used up.

These balances are piling up rapidly on Starbucks' balance sheet. Last year, Starbucks' deferred revenue balance, the account where loyalty card prepayments are booked, inflated to $654 million, from a prior-year figure of $510 million. This has enormous implications for cash flow, as the company essentially collects money well in advance of purchases through its popular loyalty card program.

North American mobile payments
It's not a stretch to assert that Starbucks leads nearly every retailer on the planet in the practice of mobile payments. Last year, research firm Berg Insight estimated that the "vast majority" of the $500 million in-store 2012 mobile transactions worldwide were comprised of Starbucks purchases. Today, more than 8 million customers use Starbucks' mobile apps, and the company is averaging 4 million transactions per week via mobile apps.

The key area to watch in Starbucks' mobile payments is North America, where 11% of in-store purchases occur on a mobile device. North America is important because the company still derives the bulk of its revenue from the U.S. and Canada. The ease of payment via mobile devices has increased Starbucks' customer base. It is crucial for the company to not rest on its laurels, but to increase the percentage of mobile purchases, which decrease customer wait time and ultimately channel more customers through each store. At the end of 2014, it will be reasonable to expect that mobile payments will exceed 12% to 14% of Starbucks' in-store sales.

Channel development
A plethora of items sold in grocery stores and other retail outlets ("channels") make up the business segment known as channel development. These packaged items include the company's whole-bean and ground coffees, single-serve tea and coffee products, and ready-to-drink bottled beverages. Channel development saw a net revenue increase of 50% in 2012, and while coming back to earth in fiscal 2013 for 10% growth, the segment is vital to Starbucks' long-term product strategy. As the company continues to innovate in its noncoffee offerings, nearly every new product will likely be evaluated for its ultimate potential to appear on retail store shelves. In 2014, keep your eye on innovations in the bottled drinks category: The company opened a massive new juicing facility in Southern California late last year to ratchet up production for its Evolution Fresh line, which is carried in more than 8,300 stores nationwide.

Breaking up the day
Starbucks has reached its current size by literally following the sun, selling coffee in the morning as its customers wake up around the globe. But increasingly the company is focused on the other times its customers drop in. Management likes to talk about "dayparts," a term first popularized in broadcast media to describe the discrete portions of the radio audience's day, from "morning" to "afternoon drive," and from which we derive the TV concept of "prime time." To Starbucks, dayparts has its own meaning: the potential portion of a day that a customer comes in for a distinct reason. With the company's new stand-alone, high-end Teavana tea stores, it's seeking to entice you to stop in for an afternoon or evening tea several times a week. After the purchase of La Boulange bakery last year, Starbucks is studying food possibilities to attract more of the lunch crowd as well. The growth of this nonfinancial measure is in some ways as important as the more quantifiable growth rates discussed above, as it opens up opportunities for increased sales around the clock.

A young enterprise in the guise of a mature company
While revenue growth is only as important as the profits it can generate, for companies like Starbucks that have demonstrated a knack for delivering consistent earnings, top-line expansion provides growth-oriented investors the confidence to take meaningful stock positions. And if the component growth rates discussed above begin to taper off, investors can treat the development as a built-in early warning signal to reassess Starbucks' knack for growing like a much younger enterprise.

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Fool contributor Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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