The Bull Case for Starbucks

Starbucks' new beverages offer major growth opportunities for investors

May 16, 2014 at 5:00PM

Solid same-store sales growth, rising revenue, margin expansion, strong income results, and management reaffirming guidance -- what more could you ask for? Apparently that wasn't enough to breathe life back into Starbucks(NASDAQ:SBUX) stock, as it has traded sideways since the company last reported.

Solid growth
In Starbucks' latest earnings release, it reported a 9% increase in revenue and a 18% rise in operating income versus the same quarter last year. In order to transform single-digit top-line growth into double-digit bottom-line growth, Starbucks expanded its operating margin by 130 basis points to 16.6%.

Part of the reason for the margin expansion was lower commodity costs, even as coffee prices rose. Starbucks is led by a smart management team, which is why the company hedges its coffee prices at least a year and a half in advance. Currently, Starbucks is fully hedged for 2014 and 40% hedged for 2015, allowing it to take advantage of comparatively lower drink prices versus coffeehouses that don't hedge their coffee purchases.

Expanding its offerings
Starbucks has done tremendously well in the past, but that doesn't mean it will continue to do so in the future. In order to keep up the growth trajectory, Starbucks is going to do a combination of things to enhance shareholder value.

The first thing Starbucks will try to do is aggressively take market share in the tea business. Already Starbucks has announced that its Teavana brand (which it acquired in 2012) has partnered up with Oprah Winfrey to boost brand awareness and leverage the popularity of Winfrey to gain access to the $90 billion-a-year tea market.

Tea is just the beginning; Starbucks plans on rolling out its new, healthier soda brand soon. This is from Starbucks' latest conference call: 

Last summer, [we] tested Fizzio in select markets in the U.S. and Asia. And following the overwhelming success of those tests, we will be rolling Fizzio out to 3,000 stores across the U.S. [S]unbelt, in Singapore, Korea[,] and several cities in China this summer. We are launching the Fizzio brand with three fantastic flavors: Ginger Ale, Spiced Root Beer[,] and Lemon Ale. We'll be adding additional locally relevant flavors as the summer progresses.

The end result
Both of these initiatives will be huge for Starbucks for a couple of reasons. One, Starbucks will be able to further diversify its offerings and can slowly begin its domination of the top-tier beverage market, which will allow it to command higher margins through higher prices. Two, by expanding its offerings with the backing of a very well liked celebrity, Starbucks could potentially drive up foot traffic in its stores. More foot traffic could result in continued strong same-store sales growth.

Same-store sales were up 6% globally last quarter; with 6% growth in the US and the Americas, 7% in China and the Asian Pacific region, and 6% growth in EMEA (Europe, the Middle East, Africa). If adding more beverage offerings boosts foot traffic, same-store sales growth will continue to come in strong, which will significantly boost the top line.

Combine larger revenue streams from more stores being opened and higher comparable-store sales with higher margins, and you get amazing bottom-line growth that can be used to increase Starbucks' 1.5% dividend or buy back shares.

Foolish conclusion
Starbucks is doing a lot more than just expanding its beverage offerings; it also plans on adding more food items and further expanding its presence geographically. But the beverage side is the thing to follow. Any chain can open up new stores in countries with high GDP growth rates and experience high same- store sales growth. But not every company can do that in countries with low growth rates (cough Europe, America), yet Starbucks did. 

Starbucks' ability to expand its premium offerings into other foods and beverages while being able to sell its products at a "nice premium" is why this company is worth a deeper look.

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Callum Turcan owns June 21 and October 18 Starbucks call options. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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