On the back of its strongest holiday ever, Starbucks (NASDAQ:SBUX) posted spectacular Q1 2015 (fiscal year) results on Jan. 22. Not only did the company break its first-quarter revenues, operating income, and EPS records, but last quarter marked Starbucks' 20th consecutive quarter of global comp growth of 5% or greater.
Since then, Starbucks stock has surged to new all-time highs, trading north of $49.50 (split-adjusted) before settling around $48 recently. The stellar performance perhaps has some investors questioning whether they've missed their chance invest wisely in the mocha maker.
Sure, today's price tag is... well, pricey. With their Q2 2015 FY results coming tomorrow, let's dig into the company's fundamentals, what's driving its intrinsic value, and where Starbucks is headed over the next five years and beyond.
Fueling loyalty through innovation
Starbucks' strategic initiatives look beyond simply offering premium products to keep customers thirsty for more. Of course, Starbucks fans love the coffee, but they might not buy it so often without Starbucks' innovative customer loyalty offers and marketing techniques.
For starters, the java giant has over 9 million members registered with its My Starbucks Rewards Program (MSR), and dollars loaded onto its Starbucks Cards in the U.S. and Canada last quarter rose 17% year over year.
Next up, there's Mobile Order and Pay, which Starbucks plans to roll out across the U.S. this year. This feature will allow customers to place orders in advance from their smartphone and simply pick them up in-store. Honestly, could it get any easier?
Apparently so, because Starbucks also plans to roll out a delivery service later this year, too.
Starbucks CEO Howard Shultz believes these initiatives will create a "flywheel positive effect" on the overall business, leading to "increased MSR membership and app usage and creating significant additional 1:1 marketing opportunities."
True, these tactics will likely translate into faster service and could increase revenues, but investors should consider that, intrinsically, these initiatives reflect more. They represent management's shrewd and persistent focus on refining the customer experience -- a key differentiator as Starbucks' growth story somewhat slows in saturated markets or faces challenges navigating overseas markets.
Beyond the China Seas
While the days of Starbucks' rapid U.S. growth are gone, investors can still benefit from massive international growth opportunities ahead, especially as Starbucks positions itself for strong performance in its fastest growing segment -- China and Asia Pacific.
Last quarter, this region grew comps at 8% -- the highest of any Starbucks segment -- and posted the company's highest net revenues, mostly fueled by the acquisition of Starbucks Japan.
Looking ahead, Starbucks believes the full integration of its Teavana products will catalyze additional growth while allowing the company to stay "locally relevant" in the tea-loving region. Starbucks plans to double its tea business to $2 billion within the next five years, with a strong focus on growth opportunities in China and Asia Pacific. Given these projections and the company's average revenue growth rate of roughly 11% year over year, Starbucks tea business could be responsible for over 7% of total annual revenue in just five years.
While investors can expect impressive returns from the entire region, the true star of this segment -- and Starbucks' fastest growing market -- is China.
Not only does Starbucks stand to gain from increased spending by China's emerging middle class, but the country's rapid adoption rate of mobile pay and the Starbucks Card should accelerate growth even faster. Over 40% of the retailer's transactions in China are conducted via the Starbucks Card already. To stay on par with this pace, management plans to more than double the number of Starbucks stores in China by fiscal year 2019.
Consider the bigger picture
While China, mobile pay, and delivery sound like promising initiatives today, they aren't the silver bullet to Starbucks' future.
Starbucks will naturally face challenges over time, such as changing consumer tastes and market saturation, but that's why the company has made key acquisitions to broaden its portfolio and address growth challenges -- specifically with the purchases of Teavana and La Boulange in 2012 to build its tea and bakery businesses, respectively. While the company expects tea to drive greater international growth, the full integration of its La Boulange food platform in U.S. stores has already contributed 2% to comp growth for four consecutive quarters.
Ultimately, investors should consider the bigger picture, here: management has demonstrated its ability to anticipate and adapt to continual change, which should ultimately fuel its capacity to build consumer loyalty and sustain a competitive advantage.
Starbucks stock is trading for a trailing P/E around 29, while the broader S&P 500 is trading for a trailing P/E of 20.4, according to S&P Capital IQ. And while this may seem like a premium valuation, investors should consider that analysts project 16.80% growth for Starbucks this year. Compare that projection to the industry's much-smaller 5.80% growth estimate and the S&P 500's mere 2.30% growth estimate, and Foolish investors are reminded that well-run, sharp businesses with strong growth opportunities sometimes justify a higher price tag.
Of course, cautious investors could always gradually purchase Starbucks shares to account for market swings, but the point is by investing in a company that places its customers at the crux of its business model and wisely positions itself for what comes next, investors can rest assured that the coffee retailer will likely bolster their portfolio for years to come.