You could be forgiven for thinking that Starbucks (SBUX 1.09%) has reached its saturation point. It seems like just about anywhere you go — city, suburbs, airport, train station, or college campus — there's a location to meet your caffeinated needs.
Starbucks locations are popping up around the world, like this one in Leeds, England. Photo: Onar Vikingstad, via Wikimedia Commons .
So why is the company spending so much money on capital expenditures? Over the last twelve months alone, $1.2 billion has been spent!
Now that it's approaching "stalwart" status, shouldn't Starbucks be focusing on juicing profitability and increasing its dividend? The answer to that question is "no," and investors should be excited about why.
Spending more than ever
Here's a peek at Starbucks' history when it comes to capital spending. As you can see, the current pace is far beyond anything seen in the company's recent history.
The big question beginning investors need to know the answer to is: why? Why is the company spending 170% more than it was just four years ago?
The answer can be found in Starbucks' annual report, where the company states that capital expenditures are, "primarily for store renovations and new stores, as well for other investments to support our ongoing growth initiatives."
In plain speak, this means that the company believes some of its best growth days are still ahead.
That might be hard to believe for the average American, but that's because much of the growth ahead is going to come from abroad — especially in China and the Asia-Pacific region. Just look at how the overall store count has grown both domestically and abroad over the years.
Taken together, store counts in the Americas, EMEA, and APAC regions have increased by 13%, 22%, and 57%, respectively. It's important to remember, as well, that the "Americas" includes both North and South America — so there's still plenty of room to grow in that category as well.
What this means for investors
Obviously, Starbucks believes that it has huge opportunities in front of it. The store's concept has already proven very popular in Asia. Seoul, South Korea is home to 284 Starbucks' locations, while Shanghi has around 256 stores to meet customer demand, and Beijing can lay claim to 137 sites.
The company understands that the Asian consumer may also be more predisposed toward tea than coffee. That's why the company bought Teavana back in 2012 for $620 million. This approach is working: during the last quarter, sales at comparable stores were up 7%.
Even more impressive is the loyalty that Chinese customers have toward their caffeine fixer: almost 40% of all transactions taking place in the Middle Kingdom are with a My Starbucks Rewards card, and Starbucks recently opened its first 24-hour store in Beijing that's been so successful that it is already looking to open more.
During 2015, Starbucks plans on opening 1,600 new stores: 650 in the Americas, 150 in Europe, the Middle East, and Africa, and a whopping 800 in China and the Asia Pacific region. If the Starbucks concept continues to prove as popular with investors as it has in the recent past, this will no doubt be money well spent for investors.
So is the stock a buy?
Currently, Starbucks trades for about 29 times earnings, but only about 22 times normalized free cash flow. Both of those numbers are expensive — though the free cash flow number is exorbitantly high.
Without a doubt, high expectations are already baked into Starbuck's price. But that doesn't mean the stock isn't worth buying today. Investors who truly believe in the company's plans to expand abroad and are willing to hold the stock over the long-run would be well served to initiate a starter position in Starbucks, and add to that position as time goes on at better and better value points.
