Coffee. Addictive. Profitable.

Starbucks is synonymous with Coffee. Coffee is the only day time legal (or illegal for that matter) drug that nobody looks at funny. In fact, they are envious of where you got that organic hazelnut skinny latte. Results from the coffee giant were released last week: Starbucks Delivers Record Q2 Revenue and EPS. Second quarter revenues rose 18 percent to 4.6 billion Dollars, GAAP operating income increased 21 percent to 778 million Dollars, EPS on a share split adjusted basis (a 2 for one split happened on the 18th of March) grew 18 percent to 0.33 Dollars. Remembering that the share price is around 50 Dollars now.


It boggles the mind to think that the company had 210 net additions to the store network during the quarter, including having opened their 5000th store in the Asia region. At the end of the quarter, March 2015, there were 22,088 stores globally. Wow. And to think that there is not a single one around these parts. In the Americas region there were actually 2 store closures net. Most of the growth has been in China, where revenues in the Asia Pacific/China segment grew 124 percent when compared to the comparable quarter last year, mostly as a result of the full integration of Starbuck Japan.


The company also released the last two quarters combined, for their half year results, revenues are 15 percent higher than at the comparable stage last year, operating income is 16 percent higher whilst EPS is 0.97 cents adjusted for the stock split, a whopping 54 percent higher. Full year guidance is for 16-18 percent growth. At the beginning of the year the company was targeting an earnings range of around 1.55 to 1.57 Dollars worth of earnings (Non-GAAP), looking for EPS growth in the region of 15-20 percent higher. In fact their targets were more than met thus far, and that was against the backdrop of a strong Dollar.


Why own a company that is a premier roaster of speciality coffee? They operate in 65 countries around the world. Along with their delicious coffee (handcrafted apparently), the company sells tea and speciality food. Their food is fresh and compares favourably to the Woolies "fast food" segment. They also have their other businesses, Teavana, Tazo, Seattle's Best Coffee as well as Evolution Fresh and other recent acquisitions, such as La Boulange, a french styled bakery house almost exclusively based on the West coast of the US, with most outlets in San Francisco.

Teavana is exclusively in the US, Canada and Mexico, the business is a tea house and sells tea products, from leaves to teapot sets. Tazo is a tea retailer, hot and cold (iced). Seattle's Best Coffee is exactly where the name implies, in Seattle. Evolution Fresh sells smoothies, fruit juice, soups and so on, the company has been around for about as long as Starbucks, from San Francisco. You are picking up the pattern here. Lastly, there is a water business called Ethos.


The company operates around half of all of the stores, the others are franchised. What is pretty interesting, in terms of the stores that Starbucks operates (80 percent in the USA), the company sells more coffee than anything else. Of course you would think that would be obvious. The mix is however slowly moving towards to more food, more other. At 73 percent beverages in the sales mix tells you that it is still a coffee destination. That is the allure, globally coffee is a soft luxury product. A place to meet, free wifi, free aircon. Great food, great coffee, great vibe. If you have visited the stores, then you know what I am talking about. Obviously the Chinese growth story is going to be key here, not only for Starbucks, for other businesses like Apple too, which we discussed yesterday. The rise of the Chinese consumer is going to be the next engine of growth in China, moving towards a consumer driven economy.


Earnings per share should clock around 2 Dollars next year, 2016, that represents a forward multiple of 25 times. The yield is around 1.26 percent at current levels, the dividend is 16 cents a quarter. The brand is incredibly strong, earnings growth has been strong, the stock price is likely to not show the same sort of growth over the last year, which has been 40 odd percent. I do however think that the opportunity to own a powerhouse brand in a strong growing beverage market and in particular coffee house culture globally, look no further than this business. We continue to buy and own these as a core part of our portfolios.