Starbucks (SBUX) made a surprise move this morning when it announced it would be closing its chain of La Boulange Cafes. This immediately raises major questions for holders of Starbucks stock.
Is Starbucks’ plan to diversify its revenue stream into food and other non-coffee items still on track? And will this make it more difficult for SBUX to grow via acquisitions?
While Starbucks is closing its 23 La Boulange bakery cafes, it’s actually keeping the La Boulange brand and menu items for food it plans to sell in its regular Starbucks-branded stores. Overall food sales were up 16% last quarter, and SBUX still plans to double its food revenue within the next five years.
So for Starbucks, the decision to close La Boulange would seem more like a tactical retreat than a strategic surrender.
Starbucks plan to expand into food makes sense given that the market for coffee shops in most American cities is looking a little saturated. For Starbucks stock to continue crushing the S&P 500, boosting same-store sales will be critical.
Not that Starbucks is doing a bad job on that front. Last quarter, global same-store sales were up 7% with a 3% increase in foot traffic. So not only is Starbucks pushing more people through its doors, it’s also getting them to spend more on each visit.
As for the second question, I have some doubts. This is not the only closure Starbucks has in the works.
SBUX also plans to close its Evolution Fresh juice brand. Starbucks originally paid $100 million and $30 million, respectively, for La Boulange and Evolution Fresh. That’s a trivial amount of money for a company the size of Starbucks. Starbucks stock has a market cap of nearly $80 billion and does $18 billion per year in annual sales.
But if you’re the owner of a company that Starbucks is considering buying, you might think twice before selling if you expect them to dump your life’s work down the drain when it no longer suits them.
We’ll see. The owners of La Boulange and Evolution Fresh can no doubt take solace in their substantially larger bank accounts.
Where does all of this leave Starbucks stock?
SBUX is by no means “cheap” at current prices. Starbucks stock trades for 31 times earnings and 4.5 times sales. But this is also a 18% quarterly revenue growth and a return on equity of an eye-popping 47%. I would argue that Starbucks stock is reasonably priced and the company is more or less fairly priced.
Are there any major roadblocks ahead?
Maybe. Starbucks fastest-growing large market is China, and SBUX plans to add 850 new stores in the China/Asia Pacific region. While I consider that a long-term positive, it could be a major short-term negative if Chinese growth continues to slow.
That said, Starbucks is still primarily a play on the American consumer, as nearly 70% of its sales come from the Americas. This mostly insulates Starbucks from the strong dollar worries that have hit many American names the past two earnings seasons.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. As of this writing, he held no positions in any of the aforementioned securities.
