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Starbucks Burger: Good Strategy or a Possible Distraction?

According to a recent Associated Press article, Starbucks (NASDAQ: SBUX  ) will open a La Boulange bakery café in Los Angeles that will include expanded store hours until 10 P.M. and will sport a "modern farmhouse" theme. The restaurant will sell wine, beer, cocktails, and milkshakes. Most notably this new expanded restaurant will also sell "build-your-own burgers" among other things. There are two things wrong with this new store format that should concern Starbucks' long-term investors.

Starbucks' core competency
defines core competency as "A narrowly defined field or task at which a company excels."  This company excels at serving beverages, specifically coffee, tea, and refresher drinks. Over the past 10 years Starbucks expanded revenue and free cash flow 181% and 294% respectively resulting in a total stock market return of 243% doing just that. More recently, Starbucks year-to-date revenue and net income grew 11% and 18% respectively.  Adjusted for a one time litigation charge Starbucks grew its year-to-date free cash flow 44%. 

Starbucks also excels, though not as much, at serving high-end pastries. Recently, Starbucks reintroduced its cake slices after another line of pastries fell into dismal reception. Contemplation into serving dinner items and alcoholic beverages may draw in more customers and attempt to compete with other coffee restaurant chains that serve croissant sandwiches, donuts, and tea. However, it could be argued that the company stands in danger of devoting resources to something that could turn into a costly distraction.

Lack of long-term vision?
Linda Mills, a spokeswoman for Starbucks, in reference to future plans with La Boulange said, "We're going to see how this one goes." This may suggest that Starbucks lacks long-term vision when it comes to La Boulange's burger venture. A company vision for any initiative will increase its odds of success. The question remains, after spending $100 million  for La Boulange, is the company going to sink more money into a venture by the seat of its pants?

You could argue that this represents a test expansion, but only time will tell if it's a success or failure. 

Staying the course
While it's part of Starbucks' corporate culture to try new things, Starbucks should stay the course with its traditional Starbucks restaurants, serving its traditional coffee based drinks, tea, and refresher drinks while coming up with new ones. If Starbucks continues with its burger plans investors should keep an eye out for declining same store sales over the long-term. This could serve as indication of loss of focus. On the other hand, this relatively small bet could pay off. Long-term investors should hold onto their shares and collect dividends while waiting for these new initiatives to potentially pay off.

More stocks that pay dividends while you wait
The smartest investors know that dividend stocks like Starbucks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

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William Bias

William has been a stock market enthusiast since 1992.

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8/28/2015 4:00 PM
SBUX $55.63 Down -0.32 -0.57%
Starbucks CAPS Rating: ****