Coffee is a great product

Last night we received Q3 results from one of my favourite companies listed in New York, Starbucks. Before we delve into the numbers here is an extract from an article I read titled 3 reasons it's hard to hate Starbucks.


"Five years ago, Seattle-based coffee chain Starbucks wasn't in a good place. In its fiscal 2008 annual report, the company showed a 3% contraction in comparable store sales, a bitter piece of punctuation following three consecutive years of sales growth deceleration. This is no exaggeration. By the end of 2008, Starbucks stock was trading below $10, less than half of where it was at the end of 2007 and well below its 2006 peak of just above $35. Investors apparently wanted nothing to do with a company whose business is predicated on premium coffee and free Wi-Fi."


If you read the article it goes on to explain how Howard Schultz, the well known CEO, turned the business around by investing in the employees and the people of Starbucks. He really is one of the best CEO's out there, in the league of Jeff Bezos, Steve Jobs and Warren Buffett in my humble opinion. Read the article, it is very insightful.


Fast forward to 2014 to a record third quarter with sales growth of 11%, comparable stores sales growth of 6%, operating income growth of 25%, operating margin expansion growth of 2% to 18.5% and earnings per share growth of 22% to 0.67c. The company opened 344 stores in the quarter with a total of 20863 stores. Compared to McDonalds with 350000 there is still a lot of room to grow. This is the 18th consecutive quarter of same store sales of more than 5%.


So what are these guys doing right? Firstly coffee is a great product. It is a socially acceptable stimulant that doesn't seem to have any long term negative affects. And it is delicious. The Starbucks coffee brand is by far the leader in the sector. The Nike or the Apple of the coffee world.

But for Starbucks the innovation in other sectors is really exciting. Teavana which is a fine tea and tea bar concept endorsed by Oprah already has over 360 stores. Breakfast sandwiches grew by 40%, baked goods are flying and they have big plans for the lunch market. The business is also experimenting and succeeding with online retail. The Starbucks app allows you to order online before you pick it up as well as do the payment through the app. Here is what Howard Schultz had to say about the quarter.


"Starbucks Q3 represents another quarter of outstanding operating performance in which each of our segments contributed to record results. The increasing power of the Starbucks brand, the success of our best-in-class mobile, social and digital technologies and our greatest asset - over 300,000 partners who deliver the Starbucks Experience to over 70 million customers around the world each week - position us to continue growing our business around the world and into the future."


As you can imagine, the stock is not cheap, earnings for the full year are expected to come in at $2.70. Trading at $78 or 29 times earnings a lot is expected from this company. But with earnings growing around 20% and sales expected to grow 10% for the next few years you can see why. The company expects to add 1600 new stores just this year.


Another huge potential growth factor is the geographic spread. At this stage the US and Canada is still responsible for 75% of sales. Even Europe is less than 10% of sales. The opportunity to expand what is already a global brand to areas where they do not have exposure is there for the taking. South Africa is a prime example. We love the theme and we back management to continue to grow from what is actually still a low base. We continue to add to this stock.