Last week, Starbucks (SBUX +0.77%) handed in an excellent second quarter, emphasizing the strengths that it has as a business, and pointing out the road that it has ahead of it. Wall Street wasn't blown away, and the stock dropped about 1% over the course of Friday. That's OK, though, because Starbucks met expectations, and proved that its current strategy is going along just fine.
In fact, it was more than just an average quarter, and comparable sales extended their long run of big gains. Revenue, operating margin, and income were all up as well, and management increased its fiscal-year guidance based on that strength. There are still some challenges ahead, but it looks more and more like those will turn into new sources of revenue as the company continues to grow.
Starbucks' strategy
Start with 1,500 new stores in the U.S., and you have a good idea of what the plan looks like. Starbucks has no intention of slowing down its expansion. More than 300 of those locations will be open this year, and we're not even talking about China yet. The company had an 8% increase in comparable sales in China, last quarter. That result helped Starbucks to global comparable-store sales growth of 6%, which made it the 13th quarter that the company exceeded 5% growth globally.
The question for investors and management is, "How will Starbucks keep that level of growth up?" Retail sales, tea, and food all come to mind as potential answers. Recently, the company has brought its bagged retail coffee into its reward system, offering customers who buy Starbucks in the grocery stores a reason to come into the cafes.
Starbucks also purchased Teavana at the beginning of the year and has announced plans to expand the business, adding eight stores last quarter with more to come. At the end of the quarter, the company already had more than 325 Teavana locations. That business will open up new consumer markets and give Starbucks something to hold onto as it grows in the United States.
Finally, food made an impact in the quarter, lifting comparable sales. Starbucks is rolling out its La Boulange range and now has a presence in 439 stores in the United States. As that line grows, the company is going to see more and more of its income generated by food. That will not only help growth, but it should also eventually help balance out costs so that a smaller percentage of the business is subject to the broad swings in coffee prices.
Competitors to watch out for
While Starbucks could be said to be in competition with every cafe, I'm looking out for Panera Bread (PNRA +0.00%) and Kraft (KRFT +0.00%). Panera is the cafe that has the best shot at making a dent in Starbucks' ironsides, with its extensive food menu and rapid growth. The company posted a comparable-sales increase of 3.3% last quarter, and the beginning of its current quarter was even stronger. If Starbucks makes a concerted push into food, Panera could be its biggest hurdle.
Kraft has taken a more aggressive tack with its Gevalia brand bagged coffee. The company has done taste tests likening it to Starbucks coffee, and has essentially launched a marketing campaign telling customers, "Think you like Starbucks? Then you'll love this!" That could be some stiff competition.
Even with the competition, I'm sticking with Starbucks. CEO Howard Schultz is a tiger, and the plan that the company has in mind for the next year looks solid. While the stock is trading near its all-time high, I still think it's worth a look.
