Starbucks: Sprinting On A Jogging Track

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Coffee giant Starbucks Corporation (NASDAQ: SBUX) is scheduled to report its Q3 fiscal 2015 results on July 23. [1] The street analysts are expecting the company to report an EPS of $0.41 on $4.86 billion in revenues for the June-ended quarter. [2] The company is not only outperforming its competitors in the industry over the last 12 months, but the company’s stock is trading at a high P/E ratio as well. SBUX is trading at a P/E ratio of 33 in comparison to 19 for the S&P 500, 18.8 for McDonald’s (NYSE:MCD), and 19.8 for Keurig Green Mountain (NASDAQ:GMCR). Robust comparable sales and a positive guidance on its digital payments and other future plans are some of the main things investors would be looking for.

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Despite the fluctuating coffee prices last year and strong competition from other brands, the company managed to post high margins and impressive sales figures. Starbucks posted an 11% year-over-year (y-o-y) increase in the net revenues in the year 2014. Starbucks has a lot to show off this year as well, with the introduction of ‘Starbucks Reserve Roastery and Tasting Rooms’ and ‘Starbucks Reserve stores,’ and is planning to expand this initiative. Furthermore, the coffee giant has entered into new beverage segments and plans to increase its markets share in those segments. Some of the main highlights in this report will be the impact of Starbucks Reserve stores and mobile services to the company’s revenue growth. Other things to watch out for will be the company’s long-term growth plan, future plans for its new beverage segments, for its digital payment, and for its food services.

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Trefis estimates the stock price for the company at $48, which is roughly 15% below the current market price.

See our full analysis for Starbucks Corportion

Digital Payment: The Differentiating Factor

Starbucks’ mobile payment and ordering initiative is one of the most talked about topics in the industry. This feature is not only convenient for current customers but is also luring in new customers. Apart from saving time and effort for the customers, this also helps the company outlets to provide better counter services, in turn resulting in a better customer experience, which is the whole idea of Starbuck’s mobile payment business plan. According to the company’s data, 19% of all the transactions at Starbucks’ outlets are through mobile payments, and it is approaching 20 million mobile payments per week. [3]

However, the distinguishing factor in Starbucks’ mobile commerce feature, apart from the fact that no other company is close to such a huge amount of payments per week, is that the company has strategically integrated an innovative reward programs and ‘Stars as currency’ feature with the mobile payment. With over 16 million active mobile app users and nearly $1.1 billion loaded on users’ apps in the previous quarter (Q2), the company is expecting the mobile payments to play a vital role in the third quarter. By the end of Q2, the company has expanded its ‘mobile order and pay’ to over 600 stores in the Pacific Northwest, and has plans to aggressively expand the feature nationwide by the end of this year. [4]

Starbucks Reserve Stores: Sweet Or Sour?

The concept of Starbucks’ Reserve stores is now more than 6 months old, and this is the time when the concept should start bearing fruit for the company. The menu items in these Reserve stores are much more expensive than those in regular Starbucks stores. [5] Apart from this, Starbucks’ Reserve Roastery and Tasting rooms is another concept store opened by the company 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. [6]

Each roastery room is projected to produce 1.4 million pounds of Reserve coffee per year. The roastery in Seattle is experiencing great customer and visitor response, giving the company a boost to open its second roastery store in 2016. Starbucks is planning to expand the availability of Starbucks Reserve coffees to over 1,000 locations. The roastery provides the company the opportunity to launch 500 Starbucks Reserve stores around the world. Apart from providing super-premium coffees made by new coffee brewing methods, the stores will also include Teavana kiosks. This might gather consumer interest in super-premium loose leaf and packaged Teavana teas. These stores are indirectly aimed at increasing the customer count and hence, the revenue growth.

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On the other hand, the company has introduced Reserve coffees in over 1,200 regular stores worldwide, to drive additional customer traffic. Starbucks now serves Starbucks Reserve coffees in around 136 locations across 10 markets in China and the Asia-Pacific (CAP) region.

Now the question that arises is how big the concept can grow, and how long will it take the company to actually accomplish its corresponding plans. To answer these questions, one might have to wait for its impact on the company’s margin growth in the next few quarters. Either this segment can be the next major business driver for the company, or its unpopularity among the middle-income customers might cause genuine problems.

To summarize, Starbucks’ ability to gain customer attention through innovative new reward programs and never-seen-before concepts will remain the key to its growth in top-line performance for the next several years.

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Notes:
  1. Starbucks, Q3 earnings call conference []
  2. Starbucks, market estimates, yahoo finance []
  3. Starbucks, Bernstein Thirty-first annual strategic decisions 2015, transcript []
  4. Starbucks, Q2 2015 earnings call transcript []
  5. Starbucks Reserve Roastery and Tasting Room opens at the base of Capitol Hill []
  6. Starbucks Reserve Roastery and Tasting room creates sensory coffee experience []