Back in 2008, things looked grim for Starbucks (NASDAQ:SBUX). But the company’s legendary founder, Howard Schultz, came back as CEO and wasted little time in making tough decisions. He cut staff, closed locations and introduced new products, like instant coffee.
No doubt, the strategy has been spot-on. Consider that over the past three years the annual average return on the stock has been 40.6%. Even Schultz has returned to being a billionaire again.
Despite all the good news, Starbucks still faces some challenges. Might it be time for investors to look for other opportunities, or is there still value for shareholders?
Let’s take a look at the pros and cons:
Pros
Growth catalyst. Next year, Starbucks plans to sell the highly popular K-Cups from Green Mountain’s (Nasdaq:GMCR) Keurig machine. In light of its massive distribution footprint, this high-margin offering is likely to be a nice boost for the top line.
Another promising business is Tazo Tea, which has revenue of more than $1 billion. Keep in mind that tea is the world’s No.2 beverage.
International. There is much room for growth in foreign markets. To this end, Starbucks has been making substantial investments in China. That country’s rising affluence has made premium coffees quite popular. Starbucks believes it can double the number of locations to 1,500 over the next five years.
Mobile. Starbucks has always been at the forefront of digital innovations. For example, the company has launched several apps for Apple’s (NASDAQ:AAPL) iPhone and Google (NASDAQ:GOOG) Android phones to allow for mobile payments. The result has been increased customer loyalty and store traffic.
Cons
Competition. It is intense: McDonald’s (NYSE:MCD) and Dunkin’ Brands (Nasdaq:DNKN) provide high-quality offerings at discount prices. At the same time, Starbucks faces tough rivals on the premium side of the market, like Caribou Coffee (Nasdaq:CBOU) and Peet’s Coffee (Nasdaq:PEET).
Costs. While Starbucks has diversified its product offerings, the fact is that it relies heavily on coffee, which can be quite volatile in terms of costs. Thus, if there is bad weather or even geopolitical problems, there could be supply issues.
Economy. Unfortunately, based on the latest government reports, the U.S. economy appears to be slowing down. Will consumers be willing to pay high prices for coffee, or will it continue to be an “affordable luxury”?
Verdict
As seen with the latest quarterly report, Starbucks continues to show lots of momentum. Its net income was up 34% to $279.1 million while revenue was up 12% to $2.9 billion.
Looking over the next couple years, Starbucks should continue to get traction from its new product offerings, like VIA, as well as the launch of the K-Cups offering, which could be a game changer.
In addition, Starbucks is a big play on emerging markets, even though it is still in the early stages. For investors, the pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
