Starbucks (NASDAQ:SBUX) recently presented at Goldman Sachs' 14th Annual Global Retailing Conference, and participants were in for an introduction to CFO designate Peter Bocian, who will take over the role on Oct. 1, when Michael Casey leaves the post.
Financial guidance for earnings and revenues for 2007 and 2008 hasn't changed since previous communications. However, Bocian fielded some interesting questions about some of Starbucks' competitive strategies and current situation. And Casey popped in to answer some questions for old time's sake several times as well.
Smoothie sailing
My former housemate used to insist on calling Starbucks' Strawberries & Creme Frappuccinos "smoothies," but the baristas would have none of it. As it turns out, Starbucks has been testing actual smoothies. Although Bocian wouldn't say whether the smoothies have been successful in trials, he did point to two trends Starbucks can take advantage of: the health-and-wellness trend and the satisfaction customers get from seeing beverages made by hand.
Some might wonder whether conquering markets like China and India might be easier said than done, and one questioner pointed out that both of these massive countries are traditionally tea-drinking cultures. While Starbucks does serve tea (it has an entire line called Tazo), Bocian said that although the company "leads" with coffee, the "Starbucks experience" is gaining a strong reception, regardless of whether cultures traditionally prefer coffee or its less caffeinated alternative.
Not surprisingly, Starbucks said it embraces competition from large chains like McDonald's (NYSE:MCD). The more people are aware of and educated about quality coffee, the more Starbucks can capitalize on the expanding market. Starbucks also believes that its experience is well differentiated from its rivals.
Balance sheet balancing act
Dairy will continue to represent a high cost in 2008, as it has in 2007. Although dairy prices are expected to improve next year, Bocian said improvements won't occur till late 2008. He also said the company is trying to strike the appropriate balance between pricing and the customer experience. After all, the company has increased prices twice in recent memory.
While the company plans to improve international margins, it's currently choosing to take that hit in order to drive long-term strategy. Slower growth overseas might allow Starbucks to more quickly improve its margins, but given the opportunities in entering new markets (it has recently entered Russia, as well), such international expansion is a serious part of Starbucks' long-term strategy.
As for the balance sheet, Starbucks was questioned on its increasing debt, given the macro credit environment right now. Michael Casey popped in for that question, explaining that the company chose to add debt into its capital structure in order to reduce its weighted average cost of capital. It's been buying back shares and will continue to do so for as long as the stock is viewed as undervalued. He also said that, in the future, shareholders can expect Starbucks to keep it up and possibly even introduce a dividend, with an element of debt on the balance sheet.
My ears perked up at "dividend." Although dividends are often associated with slow growers, some growth-oriented companies, like Whole Foods Market (NASDAQ:WFMI), do return cash to shareholders this way. And for now, Starbucks' growth is slowing (just a tad), even though it still plans 40,000 total stores when all is said and done.
Maybe the thing that doesn't impress me as much is using debt for such purposes. While I know some companies do use debt in this manner -- and I know that debt is not necessarily bad, when it's taken on in a prudent manner -- I generally prefer companies that don't have debt on their balance sheets. There's an argument that debt-fueled buybacks and dividends can be a bit of financial engineering that not all of us shareholders feel entirely comfortable with, especially given debt's risks when times get tough, either for a specific company or for the economy at large. (The Fool has two very enlightening articles on capital structures and debt. Check them out here and here.)
Growth's on the menu
I have recently admitted that Starbucks is facing challenges as it continues to expand; maybe I'm a cynic, but I love to ponder risks, and I feel it's wrong to ignore them. Still, too much gloom and doom seems a bit misguided here, so Starbucks shareholders shouldn't fret too much
I mean, can we really complain that much about double-digit growth in earnings and sales, even if the rates are slowing down just a tad? Plus, Starbucks' debt-to-capital ratio is 27%, which doesn't sound like too much leverage, given its strong cash flow. And, of course, most of us have already noticed that -- as negativity has taken hold -- Starbucks has lately been trading significantly below its historical price-to-earnings ratio. And while the coffee giant may face challenges and tougher rivalry, given the company's historical success, it's easy to imagine that Starbucks will overcome challenges and increase its market share -- all while continuing its expansion and penetrating new markets.
At any rate, whether you consider yourself a Starbucks bull or bear, the Goldman conference introduced a new executive and served up some interesting strategic food for thought.
Pour yourself some related Foolishness:
- Starbucks thinks it's well differentiated, but McDonald's willingness to tinker a little bit with its brand has worked in Europe (and might be cause for concern).
- Last quarter, I asked whether Starbucks has changed.
- I checked out another conference Starbucks presented at during the summer.
