So Much for Starbucks’ Back-to-Basics: Juice, Kiosks, Bakeries – Go Nuts, Howard
Starbucks (SBUX) bought a bakery last week by spending money more than it ever has on an acquisition. And for a brief moment, the unthinkable happened: investors sold the shares on worries that CEO Howard Schultz had made a mistake.
It didn’t last long. Everyone quickly remembered how happy Starbucks shares made people over the years and brought the price back. With the shares up more than 250% in the past three years, Schultz can run a bakery if he wants.
Starbucks has bought a lot of benefit of the doubt with that share price performance. That trust probably will work out fine for everyone involved if the economic recovery continues even at the snail’s pace of last year. But if you’re worried, like many are, that the U.S. unemployment rate might be worse than it looks; that the burst of consumerism in China is unsustainable now; or that Europeans will soon find the 5 Euro coffee drink a bit much, Schultz’s latest diversions are worth a look. Especially if you remember what happened to Starbucks shares in the last economic recession.
Starbucks has spent money in several unexpected ways recently. While investors knew that the company wanted better food in its coffee shops, many expected a partnership to create a proprietary food brand rather than the $100 million acquisition of Bay Bread LLC and its 17 La Boulange bakeries. Two days later, while analysts were still mulling whether Starbucks paid too much for that, the company announced an agreement to sell discounted cups of joe through hundreds of Coinstar (CSTR) vending machines. That’s a move that may or may not: a) cheapen the brand, or b) eat into store sales. Last year, Starbucks bought juice company Evolution Fresh and announced plans to open a whole new chain of stand-alone juice and sandwich shops.
The deals have their pros and cons, but their biggest threat generally is the potential distraction just as the going gets tougher. The great recession that pushed Starbucks toward penny stock territory four years ago led to massive cost cutting and a renewed focus on Starbucks’ core customers. The overhaul made the share price what it is today, but the underlying gains from those changes appear to have gone as far as they can.
Future share price growth lies – as does the success of 1,000 new stores this fiscal year -- in bigger sales at the 17,000-plus existing stores. Almost all of those new stores are in places where economic recovery is wallowing (400 in the Americas, for example) or where growth rates are decelerating quickly. (200-ish in China). Some of those new stores will be in the depressed economies of Europe, too, but the company lumps those numbers in with the Middle East and other regions.
The company intends for the bakery and juice acquisitions to help with the second objective by giving fast food seekers more wholesome offerings than competitors McDonalds (MCD) and Dunkin’ Donuts (DNKN). Both Bay Bread and Evolution Fresh are brands that consumers pay up for in upscale groceries like Whole Foods Market (WFM). But the Coinstar partnership’s fit into this philosophy is a bit of a head scratcher. Coinstar kiosks set up in, say, a Walmart (WMT) or Walgreens (WAG), will stream out a cup of Starbucks’ Seattle’s Best brand coffee for a buck. Perhaps it’s a hedge against a time when $1.50 for a barista and a cup is too expensive.
At 31 times earnings and more than three times sales, Starbucks shares are among the most expensive in the food sectors. This isn’t anything new and probably shouldn’t be the biggest concern of today’s investors. YCharts Pro gives the company very strong marks for fundamentals and an average score for share price value.
If this moment in time turns out to be a temporary detour on the way to international economic recovery, Schultz’ timing on these new ventures couldn’t be better. More likely though, this is a recovery that will make Starbucks cafes new and old work very hard to match the successes of recent years. Now they need to do that while learning to run bakeries; rolling out new juice shops; managing two grocery distribution businesses; and selling kiosk coffee. Let’s hope Schultz doesn’t have to write another book about returning the company to its roots.
Filed under: Company Analysis