Starbucks Banking on Beer and Yogurt

by Jeff Reeves | July 26, 2013 1:22 pm

Starbucks Banking on Beer and Yogurt

Starbucks Corporation (SBUX[1]), the blue-chip coffee stock known for its mochas and Frappucinos, just delivered solid third-quarter earnings this week.

But looking forward the biggest driver of growth might be outside of the coffee business, as Starbucks offerings of alcoholic beverages and Greek yogurt begin to hit locations across the U.S. in the next year.

Starbucks beer and wine may sound odd, but it could also be a important way to move into a new area of opportunity for the company — and investors.

First, Starbucks earnings[2] details: SBUX posted EPS of 55 cents per share, beating forecasts and increasing 28% over the previous year. Solid same-store sales performance and significant margin growth also led Starbucks to increase its expectations for the fiscal fourth quarter and for the full-year, as well as fueling strong Starbucks guidance for 2014.

Starbucks stock gapped up 7% Friday after the results, pushing SBUX shares to a new 52-week high. On the year, Starbucks stock is up 35% — but it’s worth noting that specialty beverage rival Dunkin Brands (DNKN[3]) is up over 30%. Fast-growing Canadian coffee and pastry shop Tim Horton’s (THI[4]) has lagged at just 17% returns in 2013.

This earnings report is obviously a great boost to Starbucks and should instill confidence going forward. But the wild card in the next year or so isn’t the existing line of products at SBUX, but the creative new offerings from Howard Schultz & Co. that push beyond just coffee.

Last year, it was announced that a number of California Starbucks chains would start selling alcohol[5] after a smaller test near the company headquarters in Seattle seemed to indicate potential in Starbucks beer and wine sales.

More recently, Nation’s Restaurant News[6] has reported that Starbucks beer and wine will be tied to a campaign called Starbucks Evenings to brand the locations as night-time destinations or happy-hour stops in addition to morning caffeine stops.

This is an interesting move, and a way for the company to find growth beyond simply opening up more shops or pushing branded packaged products via its locations or third-party sellers like grocery stores like Safeway (SWY[7]), Kroger (KR[8]) and others.

It’s also indicative of a broader push, not just beyond coffee but beyond beverages altogether. Starting in 2014,[9] an alliance with Danone (DANOY[10]) will bring fresh Greek yogurt to SBUX cafes for use in parfaits and other menu items.

Starbucks is admittedly pricey, with a forward P/E ratio north of 27 right now. And the dividend is also pretty meager at just 1.75% at current valuations, and lower than other offerings the restaurant space. It’s not a sure thing to buy SBUX stock after earnings given these factors.

But you could do worse than tie your portfolio to one of the most dominant consumer brands in America as it uses its reach to look beyond just coffee in the next year or so.

Related Reading

Jeff Reeves[15] is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[16] Write him at editor@investorplace.com[17] or follow him on Twitter via @JeffReevesIP[18]. As of this writing, he did not own a position in any of the stocks named here.

Endnotes:
  1. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  2. Starbucks earnings: http://investorplace.com/2013/07/good-news-for-starbucks-stock/
  3. DNKN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DNKN
  4. THI: http://studio-5.financialcontent.com/investplace/quote?Symbol=THI
  5. selling alcohol: http://venice.patch.com/groups/business-news/p/starbucks-to-start-serving-beer-wine-b2a01730
  6. Nation’s Restaurant News: http://nrn.com/marketing/marketing-starbucks-nighttime-destination
  7. SWY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWY
  8. KR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KR
  9. Starting in 2014,: http://www.huffingtonpost.com/2013/07/23/starbucks-greek-yogurt-2014_n_3640198.html?utm_hp_ref=business
  10. DANOY: http://studio-5.financialcontent.com/investplace/quote?Symbol=DANOY
  11. Starbucks evenings: http://nrn.com/marketing/marketing-starbucks-nighttime-destination
  12. earnings details: http://www.benzinga.com/news/earnings/13/07/3785426/starbucks-jumps-on-lifted-guidance-strong-q3-results-sbux
  13. Teresa Rivas: http://online.barrons.com/article/SB50001424052748704755304578629760385114492.html?mod=BOL_da_bt
  14. pros and cons: http://investorplace.com/2013/07/should-i-own-starbucks-3-pros-3-cons/
  15. Jeff Reeves: http://slant.investorplace.com/author/profile/jeff-reeves/
  16. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb
  17. editor@investorplace.com: mailto:editor@investorplace.com
  18. @JeffReevesIP: http://twitter.com/JeffReevesIP

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