Starbucks Reveals a Real Risk for Investors

The coffee giant is ready for an unexpected threat to retail.

Jan 27, 2014 at 4:14PM

Starbucks (NASDAQ:SBUX) by no means reported a bad quarter last week, despite retail's overall holiday sluggishness. However, its financial tidings served up interesting ideas. It's hard to imagine that a coffee giant would touch on online shopping, but management discussed the overall retail landscape. Starbucks faces some risks as well, but it's looking stronger than many in a retail disruption.

The coffee giant's numbers proved a holiday anomaly. Starbucks' operating income increased by 29% to $814 million, and revenue increased 12% to $4.2 billion. Worldwide same-store sales increased 5%, with a 4% jump in traffic, the same comps reported for the U.S. and the Americas. 

Still, looking beyond the simple numbers and a smidge of slowing sales growth, an unexpected factor frothed to the top: online shopping. Starbucks' founder and CEO Howard Schultz dedicated time to talk about the shift that's rocking retail to a greater extent than ever, although the message management tried to convey was of their own pre-emptive preparation, not panic.

Retail disruption
According to management's view, the Internet's disruptive influence on traditional retail isn't necessarily a bad thing for Starbucks' business. Its focus on its own wireless capabilities lets customers easily buy and give gift cards using technology like mobile apps. About 10 million customers now use Starbucks' mobile app. This is one of the ways management has been trying to address coming changes. The My Starbucks Rewards Loyalty Program is also a way to get customers hooked; it now has 7.3million active users. Starbucks fields 5 million transactions via mobile applications every week. 

Schultz's warning about the reality of a retail sea change says a lot about brick-and-mortar overall. Although Starbucks likely wouldn't take a direct hit from Amazon.com (NASDAQ:AMZN) -- unless the latter starts delivering hot, customized coffee via drones -- it does underline Amazon's tendency to hobble brick-and-mortar companies like Best Buy and Barnes & Noble. It also helped kill now long-departed Circuit City and Borders.

Although Schultz emphasizes the change as one the company is addressing well, more critical shareholders might wonder about indirect ways the change could impact Starbucks. Cafes located in shopping malls and high-traffic retail areas could have a hard time drawing foot traffic if such shopping diminishes and stalls out as more people stay home and shop from their couch.

Still, another argument from management still holds: that the "third place" atmosphere is part of what makes Starbucks' cafes tick. It's a legitimate destination for many people on its own merits. Thankfully, management also pointed out that mall-based stores are a small part of its business. 

Growth factors
In recent years, Starbucks has certainly been positioning itself well for different growth channels. It has opened two Teavana cafes in New York City and Seattle, and management believes it could grow the tea market just like it did with high-quality coffee.

It's also been testing out baked goods, specifically croissants, speaking to its acquisition of La Boulange. So far, Starbucks has experienced doubled croissant sales compared to its prior offering.

Schultz mentioned one of the things that's been worrying SodaStream (NASDAQ:SODA) investors -- the $140 billion worldwide carbonation industry that's still ripe for the taking. Its efforts are nascent so far, but Starbucks has already seen some positive results with handcrafted carbonated beverages in some test stores. 

One of the most fascinating things about the carbonated drinks idea is the concept that it could drive Starbucks' food sales, creating what Schultz called "an incremental need state" for customers in its cafe. Here lately, many SodaStream investors have been worried that such a "need state" might be dominated by bigger companies if they head for the at-home market, and such fears have dragged SodaStream's shares down.

Sweetening the deal
Last week, the market took a nosedive. Although Starbucks' stock wasn't affected -- investors appeared to view the company as an anomaly amid the bearishness -- those who have invested in retail stocks should take notice of what they're investing in. Although Amazon sports one of the highest valuations, a peek at the retail landscape illustrates how much shopping share Amazon is incrementally consuming. It's why some of us believe Amazon is still a good buy-and-hold stock -- the possibility of growth is in many, many areas.

As for Starbucks -- another stock hardly ever considered "cheap" -- so far, it still looks worth the valuation and long-term bullishness. Even if retail foot traffic slows down, it's been preparing for a future reality. Even beyond apps and nurturing loyalty, acquisitions like Teavana, La Boulange, and Evolution Fresh all signal a business must: evolutionary thinking.

Now for some tech disruption
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Alyce Lomax owns shares of Starbucks. The Motley Fool recommends Amazon.com, SodaStream, and Starbucks. The Motley Fool owns shares of Amazon.com, Barnes & Noble, SodaStream, and 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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