Inside Wall Street: Starbucks as star baker
The premier coffee company's purchase of a bakery chain adds premium flavor to the stock.
The projected expansion of the food menu at Starbucks (SBUX) gives investors another reason to add the No. 1 coffee maker to their core stock portfolios.
Since 2008, when the stock traded at a low of $7 a share, Starbucks has become a super-charged achiever, rocketing to a high of $62 by April 2012, as sales and earnings continued to bump higher to unprecedented levels.
Some close Starbucks watchers now predict that the stock, which has eased to $53, will likely snap back and fly way beyond its high of $62 within a year, as Starbucks continues to broaden its food operations through acquisitions, the latest of which is its purchase of privately owned Bay Bread, parent of a 19-unit bakery chain called La Boulange Bakery, for $100 million.
Although a relatively small transaction, the deal should deliver a significantly large stream of added sales to its food platform, which management acknowledges needs to have a broader appeal.
"We like the move strategically, and agree with management's take that a more premium-focused food platform has the ability to more meaningfully impact Starbucks' current 30% food attachment rate," says Will Slabaugh, analyst at investment bank Stephens. Moreover, he adds, "we remain confident in sales trends and management's grip on operations, which we believe will likely make our and the Street's estimates conservative."
Starbucks is a fast-growing global premier roaster, marketer and retailer of high-premium specialty coffee, with 17,420 locations in 58 countries as of April 2012. The acquisition of the La Boulange "delivers a top-quality French bakery (and its founder and baker) that is known for its pastries, breads, and other-made-from-scratch bakery items," says Slabaugh. Currently centered in the San Francisco area, La Boulange sells its products in several upscale restaurants, hotels, and specialty grocery stores in the region.
With Starbucks eventually rolling out La Boulange's baked goods nationwide, "we see the deal as an effort to significantly raise the bar on Starbucks' bakery platform, which despite improvements and revitalizations in recent years had fallen short of reaching the level of quality of the brand's coffee in the eyes of most," observes Slabaugh.
He notes that in a recent Stephens' consumer survey, 33% of people surveyed from the age of 18 to 44 said they would visit Starbucks locations more often if it offered a better food selection. After an initial push in the coffee company's San Francisco locations, the analyst expects the La Boulange brand will begin to enter the other locations over the next couple of years.
Slabaugh, who rates Starbucks as outperform with a 12-month price target of $66 a share, says investors should own Starbucks' stock at these levels as he expects continued "strong customer demand" for its products and a "rapidly broadening channel delivery capabilities and innovation" that should drive the company's big campaign to continue to outperform in the industry.
Although some 27% of Starbucks stores are already located outside the U.S., "there remains a very large opportunity for the company to grow its store base to many multiples of this number over time," says Slabaugh, helped to a large extent by its globally recognized brand.
The Stephens analyst figures Starbucks will earn $1.82 a share in fiscal 2012 (ending Sept. 30) on revenues of $13.52 billion, and $2.32 in fiscal 2013 on sales of $14.93 billion, up from 2011's $1.62 on $11.70 billion.
Initially, the opportunity that seemed most appealing to Starbucks in its decision to acquire La Boulange Bakeries was the chance to roll out new menu items in its stores. In reality, the company wants to accelerate the rate of growth of its food platform, which accounts for just about $1.5 billion in revenues from Starbucks' U.S. company-operated stores, expanding at a double-digit rate in each of the past two years.
La Boulange represents a growth opportunity as about two-thirds of customer traffic at Starbucks don't generally order food. With La Boulange's varied food offerings, Starbucks expects that dynamics to change. Food accounts for only 20% of sales at the domestic, company-owned Starbucks locations. That's expected to ramp up with the La Boulange food items.
Most of La Boulange Bakery's menu items are organic, including bagels, baguettes, rolls and specialty bread, as well as assorted sandwiches, pastries, cakes, cookies, and desserts.
Investors may well consider Starbucks as the organic stock in their core portfolios, with all the appealing organic qualities embedded in it -- good growth, rising profitability, and global presence -- to make it a much-improved, long-term investment fare.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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