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A Peek at Starbucks in 2014

By Andrew Marder – Nov 2, 2013 at 8:45AM

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There's more of the same in store for Starbucks, and that's good news for investors.

There are about 315 million people in the U.S. these days, and for every 25,000 or so, there's a Starbucks (SBUX 0.24%). The company has been on a solid tear through 2013, with the stock up 51% year to date based largely on a 26% increase in annual earnings per share. The fourth quarter offered more of the same -- revenue up 13%, comparable-store sales up 7%, and earnings per share up 37%. I don't want to say that the success was expected, but it wasn't a huge surprise.

So let's leave the past behind us and instead focus on what Starbucks is going to do over the next year. What does the Starbucks of 2014 look like?

Source: Starbucks.

Two things that will keep Starbucks ticking
A store for every 25,000 Americans leaves only a few stones unturned. That means each location needs to be doing more with what it has instead of forcing the company to grow geographically in the United States. That's No. 1. No. 2 is that outside the U.S., the business needs to keep on pushing. While Starbucks has some international penetration -- to the tune of 5,253 stores -- it still has a lot of foreign potential.

In short, Starbucks needs to get more people through more doors. The company's balance sheet is strong, so I'm not worried about overspending. In fact, it would be nice to see it drop more cash on a bigger dividend. While the payout was increased 24% in this most recent announcement, it's still lower than it could be. Starbucks is consistently generating a healthy pile of cash.

Starbucks' U.S. opportunity
To get more out of the American locations, Starbucks is doing three main things. First, it's increasing the value of its food, giving customers a new way to spend money while simultaneously increasing its competitiveness. Second, it's offering new drink options to get coffee eschewers through the door. Finally, it's branching out beyond the Starbucks concept into Teavana, its recently acquired tea line.

Food was the company's biggest single driver of comparable-sales growth in the fourth quarter. Over the next year, customers should expect to see more from La Boulange, the bakery brand that Starbucks added last year. Right now, the bakery is only in about a quarter of Starbucks' U.S. locations. That's set to double next year, with La Boulange rolled out across the entire company-owned network -- about half of the total locations.

Right now, the bakery is just churning out baked goods in the traditional sense, but next year things are going to change. Starbucks wants to take some of the lunch market from competitors like Panera. To do that, La Boulange is going to start producing lunch items. The idea is being tested in San Francisco, and Starbucks has been happy with the results.

Starbucks on the global stage
Beyond our borders, Starbucks has a very different opportunity. The company just opened its 1,000th store in China, meaning that it only has one location per 1.4 million people there. Those locations helped the Asia-Pacific segment put up an 8% increase in comparable sales. It also managed a 37% operating margin, easily besting the U.S. segment's margin. This is a profitable and fast-growing region, and the company is planning to add 750 new stores in China next year.

In Europe and the Middle East, the situation is less shining but still good. Starbucks is planning to add about 150 new stores to the 2,000 it has right now. The company is taking a different tack in the segment, adding more licensed and franchise stores. The shift is part of the company's plan to get more out of Europe and the Middle East, where rents are higher and local knowledge is more important to a store's success.

Starbucks looks good
Overall, Starbucks looks like it's well set up for a strong 2014. As I said, I'd love to see the dividend keep marching up, and management has hinted that that's the plan. However, if getting less back in dividends means the company can more easily acquire businesses like La Boulange and Teavana, then I'm happy to see it reinvesting.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Panera Bread and Starbucks. The Motley Fool owns shares of Panera Bread and Starbucks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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