More than two weeks after Starbucks Corporation (SBUX) announced record Q1 results, Starbucks stock had failed to find any particular direction, trading generally flat or slightly higher to its Jan. 21 closing price of $58.84.
Until Friday, that is, when Starbucks stock saw three times the normal action and a 6.5% drop in price.
It seems investors no longer want to own expensive stocks. They may be right, but that’s a discussion for another day.
What I do know is that, hands down, Starbucks stock is a much better buy than any of its coffee peers including Dunkin Brands Group Inc (DNKN) … but not for the usual reasons such as same-store sales growth, product innovation, expansion, etc., that are often trotted out by analysts.
Ultimately, there is one single item that gives SBUX stock a real long-term advantage over its peers, and InvestorPlace contributor Ian Bezel hit upon that fact in his January article on the company.
Bezel noted that Starbucks’ digital app accounts for 21% of its total store transactions. He goes on to point out that the SBUX mobile order and pay system it launched this past fall, which now delivers 6 million orders monthly, is only going to make it that much more competitive against DNKN and friends.
And while the app delivers all kinds of data to SBUX that allows it to create new product and service offerings based on this information — much like Netflix Inc. (NFLX) does for developing and ordering viewer content — it’s the financial implications of the Starbucks card itself that make me confident Starbucks stock will weather any storm in the future including concerns about an excessive valuation.
Gift Cards Let Starbucks Stock Up on Cash
A quick look at the SBUX Q1 balance sheet shows a current liability of $1.45 billion for an item called “stored value card liability” which Starbucks describes as follows in its 10-K: “When an amount is loaded onto a stored value card at we recognize a corresponding liability for the full amount loaded onto the card, which is recorded within stored value card liability on our consolidated balance sheets.”
But it isn’t any ordinary liability. That’s because the cash loaded on to the card is entered into its books as an asset, not revenue. Only when the cash on the card is redeemed to pay for a drink is it recognized as revenue. For example, you get a $100 Starbucks card as a gift. The person who gave you that card paid $100 for it with the $100 entered as cash on the asset side of the balance sheet and $100 liability on the other side. When you go and spend $10 on drinks and food, $10 is recognized on the income statement as revenue and the stored value card liability is reduced to $90.
In Q1, as I mentioned, its stored value card liability was $1.45 billion or about 7.4% of its trailing-12-month revenue of $19.73 billion. That was a 47% increase over the previous quarter, primarily because of holiday revenue. And that’s after last year’s 55% increase in the stored value card liability, which SBUX called “deferred revenue” until the third quarter of 2015.
Indeed, in the past five years, SBUX has seen its stored value card liability increase by $840 million (from $608 million in Q1 2011 to $1.45 billion in Q1 2016) or 19% on an annualized basis. Put another way, it’s adding $170 million in cash annually simply by offering a gift card program.
That might not seem like a lot, but it’s enough to retire almost 10% of its long-term debt each year. Ultimately, it gives Starbucks stock an advantage that DNKN and the rest of its peers don’t have.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
