Starbucks adds to its successful recipe

The coffee chain discovers that good-tasting food also sells well, which gave its quarterly results an extra kick.

By Jonathan Berr Jul 29, 2013 10:41AM
For years, food was an afterthought at Starbucks (SBUX), an expensive, bad-tasting afterthought. Things have certainly changed.


Indeed, the coffee-shop operator overhauled its menu in recent months, adding items such as salad bowls, La Boulange baked goods and in conjunction with Danone, a line of Greek yogurt. Sales in supermarkets are also on the rise, helped by strong demand for Starbucks' noncoffee products such as Evolution Fresh juices and Teavana teas.

 Chief financial officer Troy Alstead told Bloomberg News that food sales have been "phenomenal."


In its latest quarter, Starbucks' net income rose 25% to $417.8 million, or 55 cents per share. That beat the 53-cent per share average estimate of analysts. Sales surged 13% to $3.74 billion.


A Starbucks Corp., sign is displayed outside a coffee shop in London, U.K. (Chris Ratcliffe/Bloomberg via Getty Images)Even better, same-store sales, a key measure of activity at stores open at least one year, jumped 8%, beating the 5.8% increase Wall Street had expected. Starbucks, which said its third quarter was the best in its history, also ratcheted up its earnings forecast for the year.


As if that weren't enough, coffee prices are on the decline, which may help boost fiscal fourth-quarter earnings by 2 cents a share.


Starbucks' shares, which jumped 7.6% on Friday, have surged more than 27% this year. But they're still a compelling value, trading at a price-to-earnings ratio around 32, which is under the five-year high of nearly 38. Analysts also have raised their price targets. Janney hiked its fair value estimate on the stock to $85 from $75. Jefferies raised its projection to $84.


Starbucks, which has 19,200 locations worldwide, faces plenty of competitors, ranging from Dunkin' Brands  (DNKN) to McDonald's (MCD). The coffee chain, though, has plenty going for it. Operating margins rose 150 basis points to 16.4% in the latest quarter. The company plans to open 1,400 net new stores in fiscal 2014, including 600 in the Americas.


The time to buy Starbucks is now -- before its caffeinated results push the stock price up even higher.

Jonathan Berr owns a small stake in McDonald's. Follow him on Twitter @jdberr.

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Jul 29, 2013 12:46PM
They already sold food with their drinks.  Those bugs that provided the red dye. Yum.
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