Starbucks' (NASDAQ:SBUX) stock price recently hit an all-time high. From its IPO on June 26, 1992, Starbucks has risen 170 times in value, and its stock is up more than 30% just this year alone. After these massive gains, should investors take profits and head for the exits, or do more gains lie ahead? Read on for some insights into the answer to that question.
How much growth is still to come?
Starbucks is the epitome of a regional-to-national-to-international growth story. From its humble beginnings as a single coffee shop in Seattle to now having more than 22,000 stores in 67 countries, the coffee titan's cafés are ubiquitous in the U.S. and, increasingly, the world.
But has Starbucks reached saturation? It's understandable if you think that's the case; the coffee chain's rapid expansion has become the butt of many jokes. But even in the U.S. -- Starbucks' largest market -- much growth potential still remains. But don't just take it from me; here's what CEO Howard Schultz had to say about it during a recent conference call:
Now, domestically, we are still opening up many, many stores. There were many people in this room probably a number of years ago would thought perhaps we are reaching saturation. I can tell you that is not the case. Our U.S. business is strong as it ever has been.
Yet it's Starbucks' international growth prospects that are most exciting. Massive markets including China and India remain largely untapped. In fact, Starbucks expects to double its store count in its China Asia-Pacific segment to roughly 10,000 locations, and triple its revenue and operating income to $3 billion and $1 billion, respectively -- all in the next five years.
The company is also expanding its offerings within its cafes. Its acquisitions of La Boulange and Teavana have helped to improve Starbucks' food and tea. And while Starbucks is closing the 23 La Boulange bakeries it obtained when it acquired the business, in order to focus on in-café bakery item sales, the benefits of the purchase are easy to see: Food sales, which for years have been a challenge for Starbucks, grew 16% in its latest quarter.
Management is likewise excited about its Teavana tea business. Teavana-branded beverages are the fastest-growing product segment inside Starbucks cafes. And if the company's new Teavana stand-alone stores meet prove successful, they could help the coffee king rapidly take share in the $100 billion global tea market.
The strength of the Starbucks brand also extends outside its cafes. Starbucks' consumer packaged goods business is booming, as its Via ground coffee and K-Cup line of coffee pods are steadily taking share from rivals. With a 16% year-over-year increase in revenue and a 23% jump in operating income in the second quarter, Starbucks CPG business is well on its way to hitting its goal of 60% top-line growth and 100% operating income growth by 2019.
Further helping to improve the customer experience are Starbucks' mobile apps and loyalty programs. Starbucks' mobile order and pay app is widely considered best in class, and helps to make the purchasing experience faster and more convenient, particularly during peak traffic times. And Starbucks' rewards program -- which now exceeds 10 million members -- helps to inspire customers' loyalty by rewarding them with free food and drinks for actions such as paying with Starbucks' mobile app. In turn, this helps to increase adoption of the app, which leads to more rewards -- thereby creating a virtuous cycle.
The power of the flywheel
Together, these different aspects of Starbucks' business help to strengthen its brand and consumer mindshare. Schultz refers to this as a "flywheel" effect, in which Starbucks leverages its global store base, its growing CPG business, and its mobile apps to reinforce each other and increase momentum across its product lines.
For example, by offering its Teavana and Evolution Fresh products in its cafes, Starbucks creates consumer awareness for these brands and builds momentum for its CPG business. And if shoppers purchase Starbucks' products in the grocery store for use at home, that helps position the company and its growing collection of brands in the forefront of consumers' minds, which in turn should benefit its cafes when those customers are away from home. In this way, the flywheel effect creates a powerful dynamic in which the whole is far greater than the sum of its parts.
So should Starbucks stock be sold?
With the flywheel effect driving sales across Starbucks' business lines and large multiyear growth opportunities still ahead, investors might be best served by resisting the urge to sell their shares in order to bank profits. Even with its stock trading near its all-time high, Starbucks has the making of a great long-term investment from this point forward.