Three Scenarios That Can Impact Starbucks’ Stock

+10.59%
Upside
91.01
Market
101
Trefis
SBUX: Starbucks logo
SBUX
Starbucks

Starbucks Corporation (NASDAQ: SBUX), the leader in specialty coffee, has been one of the top performers in the food and beverage industry. The company has established itself as one of the luxury coffee chains, with more than a 70% increase in net revenues in the last 5 years, reaching $17 billion in 2014. The company’s stock has grown more than 150% in the last 4 years, with the current market capitalization at roughly $72 billion. According to our estimates, the company-operated stores account for the majority of the company’s net revenues, and 60% of the total valuation.  In 2014, Starbucks’ highlight of the year was the introduction of a new concept — Starbucks Reserve Roastery and Tasting rooms, as well as the company’s entry into new beverage segments. There could be a significant upside to our valuation if the company plans on aggressive expansion of these two strategies. Moreover, the fluctuating coffee prices can play a vital role in the coming years.

We have an $45 price estimate for Starbucks, which is 5% below the current market price.

See our full analysis for Starbucks Corportion

Relevant Articles
  1. Down 7% Since 2023, Can Starbucks’ Stock Reverse This Trend Post Q1 Results?
  2. Down 26% From Its Pre-Inflation Shock High, What Is Next For Starbucks Stock?
  3. After 6% Drop This Year, Pricing Growth To Bolster Starbucks’ Q4
  4. Can Starbucks Stock Return To Pre-Inflation Shock Highs?
  5. Starbucks’ Stock To See Little Movement Past Q3?
  6. Starbucks Stock To Likely Trade Lower Post Q2

Here are three scenarios that can impact Starbucks’ stock:

Starbucks Reserve Stores – How Big Can It Get?

In December 2014, Starbucks opened the first ‘Starbucks Reserve Roastery and Tasting Rooms’ in Seattle. The concept is aimed at enriching the experience of coffee lovers by providing them a 15,000 square foot space, which serves as a site for roasting of some of the premium coffee lines. Customers are able to see the whole roasting and brewing process, with tubes running all around the space. Each roastery room is projected to produce 1.4 million pounds of Reserve coffee per year. [1] The menu items in these reserve stores are much more expensive than those in regular Starbucks stores. [2]

Starbucks is planning to expand this concept, with a target of around 100 Reserve-only new store openings in the U.S. On the other hand, the company has introduced Reserve coffees in over 1,200 regular stores worldwide. Rigorous expansion of this concept all around the world should have a significant impact on the average check size for the company. Firstly, the higher-end coffee items will positively impact the beverage spend per visit in the next 5-6 years. Secondly, the company’s initiative to provide premium roasted coffee beans in retail stores, as well as online, will provide a boost to the company’s Consumer Product segment as well.

Accounting for the provided scenario, Trefis estimates the beverage spend per customer visit to rise to $4.74 by the end of 2021. If the company accelerates the expansion of these stores worldwide, increasing the openings to around 500-800 Reserve-only stores in all the 5 big markets of the company, the average beverage check might rise to as high as $5 by the end of 2021. Moreover, the premium products might help in the expansion of margins for the company-operated margins to 23% by the end of 2021. Furthermore, the expansion of this concept in the Consumer Product segment might improve the segment’s revenue growth. Trefis estimates the segment’s revenue to reach $2.77 billion by the end of 2021. In the above mentioned scenario, the Consumer Product revenues might touch $3 billion by the end of 2021. This scenario might provide an approximately 12% upside push to our price estimate for the company.

Entry To New Beverage Segments

Starbucks is already one of the dominant forces in the coffee industry, with 13% of the single-serve coffee market, behind only Keurig Green Mountain (NASDAQ:GMCR). Apart from its renowned coffee business, the company has positive plans for expansion in the tea and cold carbonated beverage segment.  With complete integration of Teavana, the company now plans to double the business to $2 billion over the period of 5 years, with a primary focus in the China and Asia Pacific region. Both the new brands provide excellent platforms for the company to expand into bigger markets, apart from its coffee business. The company’s handcrafted tea beverages in retail stores are driving revenue growth, with overwhelming market response to Teavana branded Shaken Iced Tea and Teavana Tea Lattes.  Starbucks introduced three new carbonated drinks under its Fizzio brand — Spiced Root Beer, Golden Ginger Ale, and Lemon Ale.

Starbucks’ entry into these two new segments will provide a huge boost to the company’s beverage check, as well as attracting more customers to the stores. As mentioned before, Trefis estimates the beverage spend per customer visit to rise to $4.74 by the end of 2021, whereas we estimate the average customer per store per day to reach 670 by the end of 2021.

In this scenario, the beverage spend per visit might reach $4.90 by the end of 2021, whereas the average customers per store per day might reach 720 by the end of our forecast period. This scenario will give a 9% upside push to our price estimate for the company.

Impact Of Rising Coffee Prices

For the first six months of 2014, prices of the Arabica coffee beans surged more than 90%, shooting above $2 per pound, due to speculations of a decline in coffee production. However, the prices declined by more than 40% in the next 4 months, due to an improvement in weather conditions in the South American countries. Experts still believe that the prices might shoot up again in 2015, foreseeing a decline in the production output in Brazil. FCStone, a U.S. based group, estimates the Brazil overall coffee output at 44 – 45.5 million bags in 2015. [3]

An increase in coffee prices might force the company to raise its menu prices. However, after a certain point it is not possible for the company to pass on the rising prices to the customers. In that case, the company-operated stores might witness a decline in their margins. Moreover, the negative impact might somewhat be transferred to the Consumer Products segment as well.

Trefis estimates the company-operated margins to rise to 20.9% by the end of 2021, whereas we estimate the Global Consumer Products margins to reach 37.6% over the same period. In the above mentioned scenario, company-operated margins might drop 150 basis points over the next 6 years from their present level to reach 18.8%, whereas the Global Consumer Product margins might drop 100 basis points to 36.5% by the end of 2021. This scenario might lead to an 8% downside to our price estimate for the company.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap

More Trefis Research

Notes:
  1. Starbucks Reserve Roastery and Tasting room creates sensory coffee experience []
  2. Starbucks Reserve Roastery and Tasting Room opens at the base of Capitol Hill []
  3. Coffee Prices rise, as FCStone sees drop in Brazil’s output []