Starbucks (NASDAQ:SBUX) stock is as hot as it gets, rising by almost 30% over the last 12 months and trading at historical highs in the neighborhood of $93 per share. Let's take a look at why this is happening, and more importantly, whether Starbucks stock still offers more upside potential, or if it's best to take profits at current levels.
Beyond the coffee
Starbucks is about much more than coffee. The company is all about the customer experience -- creating a third place between home and work where consumers can relax and enjoy the company's offerings in a friendly and comfortable environment. It's reputation for quality and brand differentiation allow Starbucks to charge premium prices for its products, which generates superior profitability for investors over time.
Beyond the premium coffee, Starbucks' leadership and innovative style continue to drive company successes. Founder and CEO Howard Schultz is one of the most successful business leaders in the consumer sector. Schultz has taken Starbucks from a small bunch of coffee shops in Seattle to a global emporium with 21,878 stores around the planet, and it's growing at full speed as of the end of the last quarter. Schultz practically invented specialized coffee as a popular product category, and he understands both Starbucks and its industry to the last detail.
The company is relentlessly focused on innovation, not only when it comes to its menu, but also regarding customer experience and technology. Just in the U.S., there are more than 13 million Starbucks customers using the company's mobile apps, and Starbucks is averaging 7 million mobile transactions in its stores per week. These numbers demonstrate the company's ability to consolidate customer loyalty and build the foundations for growth over the long term.
By the numbers
The business is truly firing on all cylinders: Starbucks reported a big sales increase of 13% during the last quarter, to a record $4.8 billion. Global comparable sales increased by a healthy 5% year over year on the back of a 3% increase in the average ticket and a 2% growth in traffic. Profits are also moving in the right direction; adjusted earnings per share jumped 16% versus the same quarter in the prior year.
Comparable sales in the Americas region grew 5% during the quarter, indicating that demand remains remarkably strong, and new store openings are not cannibalizing sales at existing locations too much. Sales in China/Asia Pacific grew by a mind-blowing 86%, with comparable sales increasing by 8%, so the company has enormous room for growth in this much promising market.
Starbucks is leveraging recent acquisitions, such as Evolution Fresh, La Boulange, and Teavana, to broaden its portfolio of food and drinks offerings. This should allow for increased revenues in a cost-efficient manner, as menu innovations make it possible to grow sales while keeping fixed costs at stable levels. The combination between rising sales and expanding profit margins bodes well for Starbucks investors over the years ahead.
Management believes the business will generate nearly $30 billion in revenues by fiscal 2019, an aggressive growth target from $16 billion in fiscal 2014. While the plan is clearly ambitious, management has an extraordinary track record of success, the business is performing remarkably well, and there is still abundant room for expansion. It would not be a big surprise to see Starbucks achieving, and perhaps even surpassing, its growth targets in the coming five years.
Starbucks stock trades at a forward P/E ratio of 25 times earnings forecasts for the coming year. This is a premium versus the overall market, as the average company in the S&P 500 trades at a forward P/E ratio around 17. While valuation can be important to watch, it's equally important to note that Starbucks has enough quality, financial strength, and growth potential to justify a valuation premium. Starbucks stock is not cheap, but it doesn't need to be so in order to provide solid returns for investors.
Overall, Starbucks is a best-in-breed company delivering impressive performance and offering considerable room for expansion. The coffee powerhouse is a great name to hold in your portfolio over years, and perhaps even decades, to come.