It sounds counterintuitive. Your first thought probably is that more in-store holiday retail sales would mean more impulse purchases of coffee, other drinks, and morsels at your local Starbucks (NASDAQ:SBUX). Yet this holiday season, while shopping shifted online and away from the malls, Starbucks saw a record quarter. How can this be? The explanation may be more obvious than you think.
On Jan. 23, Starbucks reported fiscal first-quarter results. Net revenue jumped 12% to $4.2 billion. Global same-store sales surged 5%, led by a 4% increase in traffic. Operating income leaped 29% to $814 million. Earnings per share flew 25% to $0.71, a new all-time record.
If you just looked at the numbers, you would have sworn up and down that the retail stores must have been flooded with traffic this holiday season; however, CEO Howard Schultz has made it clear that was not the case. He pointed out that the traditional brick-and-mortar retailers for the first time saw their traditional foot traffic "give way to online in a major way." He went on to say that this shift actually benefited the chain.
Finally have time to kill
Anecdotally, as a frequent consumer of Starbucks' drinks, I've observed a few things. The crowds inside of many Starbucks stores have gotten thicker than usual so that the normal wait to get a seat has gotten much longer, even during "off" times of the day. People seem more likely to grab seats than ever and more likely to stay longer. This observation in combination with the numbers leads to a simple conclusion: Starbucks is becoming a place to go specifically more than ever before in addition to being a place you habitually stop by while shopping elsewhere.
This holiday season, was this because people were actually doing their online shopping via the free Internet in the stores, or is it because they'd already finished their holiday shopping at home on the computer and had a lot more free time to relax? It's probably both. In many cases, consumers do most of their holiday shopping online but still need to pick up an item or two at the mall (instead of a dozen items).
Let's face it. You drove all the way there and got what you came for in a fraction of the usual time. Why not sit down, relax, and enjoy a cup of coffee? You have the time to do it, and it's a great treat as you sit back and bask in the glory of your accomplishment, having finished your holiday shopping in record time.
During the call, Schultz credited the record results in part to increased gift cards, reward cards, debit card reloads, mobile payments, and new product offerings. This might sound contradictory to my earlier comments, but these are additional reasons that some customers probably physically went to the Starbucks stores. Once upon a time Starbucks would get the spillover traffic from the retail stores as impulse visits. Now the retail stores may need Starbucks in the hope that spillover traffic goes over to them. How ironic.
Foolish final thoughts
Starbucks added 2% more stores to its count in the single quarter. Judging from the trends, the company has a lot more room to grow in terms of store count, and the weak economy and foot traffic isn't stopping it. People still have a few bucks they can use to indulge in a coffee and perhaps a bite to eat, and this may be even more so due to these trends. Starbucks trades at a 2014 P/E ratio of less than 26 and a 2015 P/E ratio less than 22 based on analyst estimates, which Starbucks has a habit of beating. Given the rapid increase in earnings, Starbucks deserves a closer look by Fools who are looking for value and growth in an environment that seems to be helping the company flourish.
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends and 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.