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One hot cup of coffee
Starbucks (Nasdaq: SBUX) keeps pouring it on. Or in. Net revenues were up 23% for the four-week period ending Feb. 24 against the year-ago period, and also 22% for the preceding 21 weeks. Same-store sales for stores open 13 months or more increased 6% for the four-week period and 3% over 21 weeks. During the 21-week period, the company added 540 company-owned and licensed stores to reach a worldwide total of 5,249.
The company attributes much of its good results to the new Starbucks Card. In a prepared statement, Starbucks President and CEO Orrin Smith said, "In February we continued to see many Starbucks Card redemption transactions as a result of gift-giving over the December Holidays, as well as new card activations for business gifts and personal use.'' He added, "We look forward to building on this platform through new card designs and programs intended to drive non-holiday activations and redemptions.''
The Card can be purchased in a store, online, or by phone, and can be issued for any amount from $10 to $500. It's easily swiped, debited, and even reloaded for more money in any store and can be deployed online too. Fool community member tktrimbath's excellent account of the recent annual shareholders meeting includes company stats of 2.3 million cards issued, with 2.2 million transactions and 120,000 reloads already.
Who wouldn't want to make the Starbucks Card a year-round must give? It's a terrific product and boost to the company's financials, thanks to slippage and float. We like this latest innovation by a favorite Rule Breaker Portfolio holding.
Slippage
If you live in a city where you have a public transportation system with electronic cards, how many do you have lying around with balances? Unlike some really organized people and regular commuters, I don't keep one card in a hard plastic protector and use only that card. I walk to work and only use the Metro occasionally. As with my glasses, wallet, and brain, I don't always put my card in the same place. Result? I have three or four D.C. Metrocards with the odd $0.05, $0.25, or $0.10 balance on them.
In most places, you can turn old cards in for new ones and add value, but you can't combine ones already issued. Some people are going to lose cards or just decide that all the effort isn't worth a nickel here or a dime there. If you mangle a card so much that it doesn't work, you have to mail it in for a new one.
It all means that the cost of your ride goes up by the amount you don't spend, and that's all free money for the Metro. That non-use is often called slippage, and it's just one reason that the Starbucks Card is brilliant. Not every person will use every card to the end, which means that the card purchaser not only gives himself or someone else a gift, but gives the company free money too.
Float
Some of you already noticed that the Starbucks Card's sturdy plastic means it won't require surgery as often as a Metrocard, and therefore might be less slippery. True. But it floats just as well, if not better.
Every time Starbucks sells a card, the buyer gives the company an interest-free loan. When a business secures the use of your money before it has to pay it out, that's called float. If your Uncle Pennybags offers you a $20.51 card and you buy coffee a few times a week, you pay the loan off over a couple of weeks. The larger the card balance, the longer the loan, unless you generously treat your friends. Companies invest the float for the period before they have to pay you back
Other than root beer, familiar floats occur when your bank effectively owns your money before it credits it to your balance, an insurance company collects premiums before it pays them out in claims, and -- the biggest, largest, most amazing float of all -- when federal or state governments own your money during the year that they pay you back later in tax refunds.
Slippage AND float: sweet
Ah, but the sweetest life is the marriage of slippage and float. One of my nieces works in Pakistan. The only way we found initially to get lower calling rates was to use a service which bills you in $25.00 increments on your credit card. When you reach the end, it charges you again. There is no way to time calls exactly right, so the company never has to pay you off entirely. Endless float. When my niece leaves Pakistan, there will probably be a balance, and there is no guaranty she will move to a country where I need the plan or where it operates. Almost guaranteed slippage.
Starbucks Cards offer both slippage and float. Sure, you say, any gift certificate provides that, but Starbucks' business is better suited to repeat business -- revolving slippage and float -- than movie theaters or catalogues, for example. Its brand says it's something you have regularly but is still a treat, not as mundane as a gift certificate to McDonald's (NYSE: MCD) -- "Oh all right, that'll pay next time we take the kids" -- or as special and therefore infrequent as a certificate for Tiffany's (NYSE: TIF) -- "Oh no, what on earth does he/she mean by this?" Just perfect to congratulate or send off a co-worker, and no more wondering which catalogue your niece/nephew/ex-spouse's parents like or whether a check is just too crude. Apparently 2.3 million people think so already.
We'll watch the card numbers both for new card and reload increases, but it's a good bet that more and more people will "Say it with Starbucks."
Any ideas about new Rule Breaker stocks? You're welcome at the Rule Breaker-Companies discussion board (30-day free trial to read, subscription required to post).
Plop, plop, fizz, fizz, oh what a relief Tom Jacobs (TMF Tom9) is. He owns no shares of Starbucks. To see his stock holdings, view his profile, and check out The Motley Fool's snazzy disclosure policy.
