Starbucks Doubles Down on Growth After Solid Results

Starbucks (NASDAQ:SBUX) reported solid performance last week with global comparable store sales increasing 9% and operating margin witnessing an increase of 70 bps over Q4 2010.  The comparable store sales increase was driven by a 6% increase in traffic and a 3% increase in average ticket. According to Howard Schultz, Starbucks’ Chairman, President and CEO, 2011 was an extraordinary year for Starbucks, with record earnings every quarter and very strong comp store sales growth all around the world. The earnings release has met with positive investor response and consequently, its stock price is on increase, up 7% approximately since November 3. Starbucks’ competitors in the broader market for specialty coffee include McDonald’s (NYSE:MCD), Caribou Coffee (NASDAQ:CBOU) and Peet’s Coffee (NASDAQ:PEET).

Our price estimate for Starbucks stands at $40, implying a downside to the market price.

See our full analysis for SBUX

Opportunities on the Horizon

Starbucks has really emerged this past year. The company looks keen to innovate and enter into new businesses such as its recently announced plans to launch light roast coffee for mild coffee drinkers with an intent to capture this large market segment. There have been rumors that it is also trying to enter into the grocery and juice business. Here is quick peek into whats going on at Starbucks presently:

• Starbucks plans to open approximately 800 net new stores globally. Approximately 400 in the Americas, 100 in Europe, Middle East, Russia and Africa and 300 in China and Asia Pacific.
• One-half of the China and Asia Pacific new stores are planned for China. In fiscal 2011, it opened on average 1 store every 4 days in China and it plans to accelerate that pace in 2012.
• It plans to open at least 200 net stores in the U.S. in 2012 and to remodel approximately 1,700 existing stores. This is the highest it has ever remodeled in a year. Store remodels drive traffic and increase in-store efficiency.
• It plans to open its first store in India in 2012 and in Vietnam thereafter. Also has plans to add approximately 12,500 net new jobs globally in 2012.

We are very optimistic about Starbucks growth strategies. It has been trying to grow organically by way of new store openings and store remodellings. The company also looks keen to diversify its revenue base. It has been looking to enter allied businesses. It has been receptive to customer demand, recently decided to offer light roast coffee. We believe Starbucks is emerging really strong through the really tough of times we are facing globally.

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