SBUX - Starbucks Corp

[Uccmal]

I like their coffee.  But then I am a double/double guy. 

 

Sometimes, when I want a decaf or half caf, I make it at home, take it in my travel mug to Starbucks to work.  They cant do decaf or light caf. worth shit.  Believe me, its not to be cheap.  Sometimes I just want a good cuppa joe with a little less caffeine. 

 

As a stock.  I wish I had converted my Leaps  bought in April 2009 to stock, but I wouldn't buy it now. 

 

Mcdonalds coffee is pretty good here but the atmosphere sucks.  Tim Hortons is barely tolerable with lots of cream and sugar.  DD seems the same as TH.  To sum up, my own expresso maker does a better job then everything else. 

[LongTermView]

I just came across this photo and it made me laugh

LOL, they should have put more thought into the placement of those letters! One would think that checking the appearance with the door open would have been part of the process.

[TheAiGuy]

Thanks, but I'm good.  My current positions rely on application of the rule of law in the U.S. and a "retailer" run by an Ayn Rand acolyte.  Feeling good.  Why would I waste my time owning a company that sells addictive products that all their customers love?

 

I've been thinking a lot about Starbucks and I think there are worse ideas than buying this and holding on. I generally think this will do very well over time, but here's sort of a loose outline of what I think:

 

• People really like their coffee. You don't, I don't, but millions buy it every day.
  
• I like that people make small, nearly automatic transactions everyday. The cost of each coffee, in dollar terms, not relative to other coffee, is low and I doubt too many people pay attention to the price of a single coffee, let alone their run rate costs.
  
• I think this is the type of thing that they win a customer at a young age and have them for decades as habits and preferences take root
  
• Coffee is mildly addictive with little health risks and low potential for future concerns of adverse effects.
  
• There has been a demonstrated ability to raise prices
  
• The company is currently quite profitable.
  
• I like the management. I think they have shown persistence and strategic focus (e.g. multiple attempts to enter the tea market, multiple attempts to enter higher end coffee shops.)
  
• I think they have a good chance of entering and, frankly, dominating the higher end coffee market over time.
  
• I like their capital management.
  
• I like their returns on capital
  
• I think they can continue to grow in Asia and in the US
  
• Little to no technological risk
  
• Demonstrated ability to scale without brand dilution
  

 

If you take a look at the competitors in the space, the one I'd worry most about is JAB b/c I don't fully understand their strategy. They have a lot of good brands, but it's going to be hard for them to compete with SBUX outside the CPG space. Dunkin is a regional brand and MCD promise as a brand isn't good coffee, and as such, they aren't a strong competitor (though it is worth their while to try). Third-wave coffee shops are largely small chains and independents, and Starbucks is well finance and has substantial real estate expertise, which can make them a formidable competitor (I don't know about you, but most indy coffee shops are shit, though I would recommend la Colombe if you come across it).

 

The multiple's high but I can't think of anything else that's wrong with the company, and the multiple is only a major concern if there is a risk to the company's perception as a going concern. This isn't like a retailer or fashion brand where purchases are large enough and infrequent enough to promote comparison shopping. Purchases are habitual. It's a high margin product with a low absolute cost and generally affluent customer base concentrated in urban areas. And they own their go to market and have an actual relationship with their customers.

 

I think they get low, double digit EPS growth over the next decade, through a combination of store openings, price increases and share shrink, plus another 1.7% in current yield. Even if the multiple shrinks in half over that period, that's a mid-to high single digit return for what is essentially a consumer stable.

 

[KCLarkin]

Third-wave coffee shops are largely small chains and independents

 

Third-wave coffee shops can't scale. Each espresso or latte is artisanal. In order to scale, you need to automate. And once you automate, you are no better than Starbucks. And then they clobber you with their scale advantages.

 

And there aren't anyways for smaller chains to out-innovate. Starbucks will buy or copy any innovation.

[CorpRaider]

Sounds like a description of AB Inbev 5 year ago.

[Jurgis]

You guys are not concerned about Howard Schultz leaving again?

[TheAiGuy]

You guys are not concerned about Howard Schultz leaving again?

 

Of course. It's a concern.

 

I think I'm comfortable anyway. The way I see it, the problems they got into last go around had to do with brand dilution. You know, selling CDs and toys in the store as opposed to being content with coffee. I don't think they need to do much but stay on brand and they'll be fine. Obviously, companies need to change and grow but I think the strategy is to go upmarket with a new brand, which is what they are doing and what Schultz is going to be in charge of. I think the "Starbucks" brand can continue to grow largely unchanged, they are doing stuff to increase the habitual behavior of their customers with their mobile efforts, but largely I don't think someone needs to shepard the "Starbucks" brand itself. That's especially true if what Schultz is doing is growing their new brands (Reserve, Roastery), in which case, I don't worry about having someone else running things.

 

[TheAiGuy]

Sounds like a description of AB Inbev 5 year ago.

 

You mean this as a positive? 5Y returns for BUD are pretty good, but I'm not sure it's a great comp.

[JBTC]

Thanks, but I'm good.  My current positions rely on application of the rule of law in the U.S. and a "retailer" run by an Ayn Rand acolyte.  Feeling good.  Why would I waste my time owning a company that sells addictive products that all their customers love?

 

I've been thinking a lot about Starbucks and I think there are worse ideas than buying this and holding on. I generally think this will do very well over time, but here's sort of a loose outline of what I think:

 

• People really like their coffee. You don't, I don't, but millions buy it every day.
  
• I like that people make small, nearly automatic transactions everyday. The cost of each coffee, in dollar terms, not relative to other coffee, is low and I doubt too many people pay attention to the price of a single coffee, let alone their run rate costs.
  
• I think this is the type of thing that they win a customer at a young age and have them for decades as habits and preferences take root
  
• Coffee is mildly addictive with little health risks and low potential for future concerns of adverse effects.
  
• There has been a demonstrated ability to raise prices
  
• The company is currently quite profitable.
  
• I like the management. I think they have shown persistence and strategic focus (e.g. multiple attempts to enter the tea market, multiple attempts to enter higher end coffee shops.)
  
• I think they have a good chance of entering and, frankly, dominating the higher end coffee market over time.
  
• I like their capital management.
  
• I like their returns on capital
  
• I think they can continue to grow in Asia and in the US
  
• Little to no technological risk
  
• Demonstrated ability to scale without brand dilution
  

 

If you take a look at the competitors in the space, the one I'd worry most about is JAB b/c I don't fully understand their strategy. They have a lot of good brands, but it's going to be hard for them to compete with SBUX outside the CPG space. Dunkin is a regional brand and MCD promise as a brand isn't good coffee, and as such, they aren't a strong competitor (though it is worth their while to try). Third-wave coffee shops are largely small chains and independents, and Starbucks is well finance and has substantial real estate expertise, which can make them a formidable competitor (I don't know about you, but most indy coffee shops are shit, though I would recommend la Colombe if you come across it).

 

The multiple's high but I can't think of anything else that's wrong with the company, and the multiple is only a major concern if there is a risk to the company's perception as a going concern. This isn't like a retailer or fashion brand where purchases are large enough and infrequent enough to promote comparison shopping. Purchases are habitual. It's a high margin product with a low absolute cost and generally affluent customer base concentrated in urban areas. And they own their go to market and have an actual relationship with their customers.

 

I think they get low, double digit EPS growth over the next decade, through a combination of store openings, price increases and share shrink, plus another 1.7% in current yield. Even if the multiple shrinks in half over that period, that's a mid-to high single digit return for what is essentially a consumer stable.

 

It seems you made a strong case about the company's moat and defensiveness.

 

But what about growth potential? Are you not worried about the slowing same store traffic in the US? In the latest quarter same store transactions didn't even grow.

 

[giofranchi]

Thanks, but I'm good.  My current positions rely on application of the rule of law in the U.S. and a "retailer" run by an Ayn Rand acolyte.  Feeling good.  Why would I waste my time owning a company that sells addictive products that all their customers love?

 

I've been thinking a lot about Starbucks and I think there are worse ideas than buying this and holding on. I generally think this will do very well over time, but here's sort of a loose outline of what I think:

 

• People really like their coffee. You don't, I don't, but millions buy it every day.
  
• I like that people make small, nearly automatic transactions everyday. The cost of each coffee, in dollar terms, not relative to other coffee, is low and I doubt too many people pay attention to the price of a single coffee, let alone their run rate costs.
  
• I think this is the type of thing that they win a customer at a young age and have them for decades as habits and preferences take root
  
• Coffee is mildly addictive with little health risks and low potential for future concerns of adverse effects.
  
• There has been a demonstrated ability to raise prices
  
• The company is currently quite profitable.
  
• I like the management. I think they have shown persistence and strategic focus (e.g. multiple attempts to enter the tea market, multiple attempts to enter higher end coffee shops.)
  
• I think they have a good chance of entering and, frankly, dominating the higher end coffee market over time.
  
• I like their capital management.
  
• I like their returns on capital
  
• I think they can continue to grow in Asia and in the US
  
• Little to no technological risk
  
• Demonstrated ability to scale without brand dilution
  

 

If you take a look at the competitors in the space, the one I'd worry most about is JAB b/c I don't fully understand their strategy. They have a lot of good brands, but it's going to be hard for them to compete with SBUX outside the CPG space. Dunkin is a regional brand and MCD promise as a brand isn't good coffee, and as such, they aren't a strong competitor (though it is worth their while to try). Third-wave coffee shops are largely small chains and independents, and Starbucks is well finance and has substantial real estate expertise, which can make them a formidable competitor (I don't know about you, but most indy coffee shops are shit, though I would recommend la Colombe if you come across it).

 

The multiple's high but I can't think of anything else that's wrong with the company, and the multiple is only a major concern if there is a risk to the company's perception as a going concern. This isn't like a retailer or fashion brand where purchases are large enough and infrequent enough to promote comparison shopping. Purchases are habitual. It's a high margin product with a low absolute cost and generally affluent customer base concentrated in urban areas. And they own their go to market and have an actual relationship with their customers.

 

I think they get low, double digit EPS growth over the next decade, through a combination of store openings, price increases and share shrink, plus another 1.7% in current yield. Even if the multiple shrinks in half over that period, that's a mid-to high single digit return for what is essentially a consumer stable.

 

Thank you for this analysis of SBUX. Very useful!

 

Cheers,

 

Gio

[johnny]

Does anybody have any insight into what Starbucks' leases look like?

 

Do you think they extract especially favorable terms from landlords? On the one hand, they drive a ton of traffic, and put a lot of people within visual range of the rest of a properties' lessees. On the other hand, the transactions are so brief, and so many customers are in-and-out, it's not clear to me that the anchor logic exactly applies.

 

Rent escalations seem to regularly demolish indie coffeeshops in ways that don't seem to apply to Starbucks, though.

[TheAiGuy]

Thanks, but I'm good.  My current positions rely on application of the rule of law in the U.S. and a "retailer" run by an Ayn Rand acolyte.  Feeling good.  Why would I waste my time owning a company that sells addictive products that all their customers love?

 

I've been thinking a lot about Starbucks and I think there are worse ideas than buying this and holding on. I generally think this will do very well over time, but here's sort of a loose outline of what I think:

 

• People really like their coffee. You don't, I don't, but millions buy it every day.
  
• I like that people make small, nearly automatic transactions everyday. The cost of each coffee, in dollar terms, not relative to other coffee, is low and I doubt too many people pay attention to the price of a single coffee, let alone their run rate costs.
  
• I think this is the type of thing that they win a customer at a young age and have them for decades as habits and preferences take root
  
• Coffee is mildly addictive with little health risks and low potential for future concerns of adverse effects.
  
• There has been a demonstrated ability to raise prices
  
• The company is currently quite profitable.
  
• I like the management. I think they have shown persistence and strategic focus (e.g. multiple attempts to enter the tea market, multiple attempts to enter higher end coffee shops.)
  
• I think they have a good chance of entering and, frankly, dominating the higher end coffee market over time.
  
• I like their capital management.
  
• I like their returns on capital
  
• I think they can continue to grow in Asia and in the US
  
• Little to no technological risk
  
• Demonstrated ability to scale without brand dilution
  

 

If you take a look at the competitors in the space, the one I'd worry most about is JAB b/c I don't fully understand their strategy. They have a lot of good brands, but it's going to be hard for them to compete with SBUX outside the CPG space. Dunkin is a regional brand and MCD promise as a brand isn't good coffee, and as such, they aren't a strong competitor (though it is worth their while to try). Third-wave coffee shops are largely small chains and independents, and Starbucks is well finance and has substantial real estate expertise, which can make them a formidable competitor (I don't know about you, but most indy coffee shops are shit, though I would recommend la Colombe if you come across it).

 

The multiple's high but I can't think of anything else that's wrong with the company, and the multiple is only a major concern if there is a risk to the company's perception as a going concern. This isn't like a retailer or fashion brand where purchases are large enough and infrequent enough to promote comparison shopping. Purchases are habitual. It's a high margin product with a low absolute cost and generally affluent customer base concentrated in urban areas. And they own their go to market and have an actual relationship with their customers.

 

I think they get low, double digit EPS growth over the next decade, through a combination of store openings, price increases and share shrink, plus another 1.7% in current yield. Even if the multiple shrinks in half over that period, that's a mid-to high single digit return for what is essentially a consumer stable.

 

It seems you made a strong case about the company's moat and defensiveness.

 

But what about growth potential? Are you not worried about the slowing same store traffic in the US? In the latest quarter same store transactions didn't even grow.

 

Sorry for the late reply.

 

No, I'm not worried about slowing same store traffic in the US. Couple things: (1) I kinda just expect that to happen over time with some noise. I think you need a year or two of that not happening to really care,  but over time, same store traffic growth should slow as the market approaches saturation. It is important to note that this is different than revenue growth per store, which should increase more or less with inflation ex-traffic growth and with a static product mix. (2) I think they have a big opportunity internationally.  (3) I think that they have  a substantial potential to go up market, and that should drive ticket size growth over time in the US as product mixes shift.

[TheAiGuy]

Healthy grow, SSS are up:

 

https://news.starbucks.com/press-releases/q3-fy17-earnings

[Jurgis]

I don't usually go to Starbucks. Recently we went to one and it seemed quite run down: tables looked old and neglected. Is this common, uncommon, rare?

 

 

 

 

Most tables also were occupied by people who "live" there, but I think this issue has been known and around for ages.

 

[TheAiGuy]

It's not crazy rare. There is definitely some variation in the upkeep of the stores. They also have public bathrooms so people often camp out there (anecdotally, I've seen this most often in large cities in what are otherwise very busy stores). I don't know if it's a franchisee thing or not. 

[SlowAppreciation]

It's not crazy rare. There is definitely some variation in the upkeep of the stores. They also have public bathrooms so people often camp out there (anecdotally, I've seen this most often in large cities in what are otherwise very busy stores). I don't know if it's a franchisee thing or not.

 

SBUX doesn't franchise. They have some licensed stores, but it's a different model with most of those locations being inside places like hospitals or hotels or large department stores. i.e. locations that SBUX wouldn't traditionally be in

[Jurgis]

It's not crazy rare. There is definitely some variation in the upkeep of the stores. They also have public bathrooms so people often camp out there (anecdotally, I've seen this most often in large cities in what are otherwise very busy stores). I don't know if it's a franchisee thing or not.

 

This was a suburban location and opened not that long ago (5 years? I'd have to check). I was just surprised how rundown the tables looked.

 

Anyway, since it's suburban and there are no other coffee places nearby, I doubt they lose much business because of that.

 

Ice teas were pretty good although I prefer the whatever ice tea they do at Panera haha.  8) I kinda see now why Panera was bought out at pretty high valuation... if I had to choose between Panera and Starbucks, I'd go Panera.  8) But then I'm not really Starbucks customer so  ;D

 

[rkbabang]

I don't usually go to Starbucks. Recently we went to one and it seemed quite run down: tables looked old and neglected. Is this common, uncommon, rare?

 

 

 

 

Most tables also were occupied by people who "live" there, but I think this issue has been known and around for ages.

 

 

I don't go into Starbucks often maybe a few times per year, more often when I'm traveling and I don't know of a better place to get coffee.  But I've never seen a run down Starbucks location.

 

[mjs111]

SBUX doesn't franchise. They have some licensed stores, but it's a different model with most of those locations being inside places like hospitals or hotels or large department stores. i.e. locations that SBUX wouldn't traditionally be in

 

Yep. If it's a store within a store it's a licensed Starbucks, with the workers employees of the parent store, not employees of Starbucks (this creates some grumbling among licensed store Starbucks employees, who don't get the relatively generous Starbucks benefits package).  Starbucks stores in airports, Target, etc. are all licensed.

 

Mike

[TheAiGuy]

It's not crazy rare. There is definitely some variation in the upkeep of the stores. They also have public bathrooms so people often camp out there (anecdotally, I've seen this most often in large cities in what are otherwise very busy stores). I don't know if it's a franchisee thing or not.

 

SBUX doesn't franchise. They have some licensed stores, but it's a different model with most of those locations being inside places like hospitals or hotels or large department stores. i.e. locations that SBUX wouldn't traditionally be in

 

Thanks. I misunderstood that point.

[Jerry Capital]

I think he nails the bear case even though he is long

 

http://www.scuttlebuttinvestor.com/blog/2017/12/30/getting-my-fix-of-starbucks-sbux

[Spekulatius]

With the recent downturn and possibly more bad news to come, this stocks merits to be revisited. My personal buy target would be around 20x earnings or $47.

 

SBUX is a very well run Company. I say this based on my experience as a customer as well as looking at it through the investors lens. I would  specifically point out the card, which is designed to drive traffic during low traffic hours.

 

I don’t like their plan to lever up for stock buybacks. The stock currently is not really cheap,and levering up does little to revive a growth business, but limits the strategic options.

[Cigarbutt]

Have followed Starbucks for a long time and recently spent some time on it but never bought as I always felt it was too expensive...

Strong franchise despite a crowded field.

 

If history is any guide, the best buy opportunity may be further down the road just before Mr. Schultz comes back again at the helm but he may have other plans this time around.

 

Investment thesis must include 1-the fact that, for the US market, the company has reached maturity and same-store sales growth will be muffled on the upside and 2-"growth" will/would come from China.

 

Would consider buying it at 50% of the price you mention (!) so unlikely to compete here and ever in fact as if such a low valuation would occur, there would probably be less "popular" opportunities.

 

[peterHK]

A few things worry me here.

 

As Spekulatius pointed out, they're leveraging the company to do share buybacks with a stock that isn't cheap. This isn't necessarily worse than any other company (and there are many) doing the same thing, but as Starbucks was one of the best run companies, it signals in my view, a step down in terms of management thought and quality. Aside from that, it limits strategic options for the company in the future.

 

My other worry is that we've sort of seen this before with Jim Donald. Kevin Johnson is not a Starbucks insider, he's a tech guy who's been with the company only a few years. That's a useful skillset, but the last time Starbucks had a non-insider as CEO we saw worsening in the store experience (latte machines too tall, bad design, breakfast sandwhiches cheese smell overwhelming the smell of coffee) as the CEO and management team lost sight of that customer interaction.

 

I worry that we're seeing a repeat of what happened in the late 2000's, and this time, Schultz isn't going to come back.

[CorpRaider]

Yeah, went in the shitter last time.  Schultz said it is "cheap and undervalued."  Hmm.

 

EDIT:  Looking a little bit.  Seems like its in the region of an 8% earnings yield.  NSRGY deal probably has yet to take effect other than big ass cash payment up front.  Brand seems....good. 

 

Insiders steady dumping stock since middle of 2017, might be full of sh*t.