Starbucks' Stock Shares Heading Up

From The Street:

After a lackluster fiscal 2015 (calendar 2014), shares of Starbucks are racing higher after the company found a way to reaccelerate its growth. If you recall, transaction growth in fiscal 2014 had slowed to a crawl. Growth went from a high of 7% in the third quarter of fiscal 2013 to a low of just 1% by the fourth quarter of 2014. During this time, ticket growth was the only thing that kept same store sales flat to slightly down with the year before. As a result, the stock simply performed in line with the S&P 500 and investors wondered if the company had lost its touch.

But last year, management found a way to get transactions and tickets to grow again. As a result, same store sales took off and the stock followed along for the ride. In fact, in the quarter reported in October, Starbucks hit its highest same store sales number in three years. Global comps were up 8% and U.S. comps were up 9%. Part of the reason the same store sales were so good was the company is getting its food business right. Lunch and mid-day average transactions are up 30% over the last five years.

The company even found a way to get night owls into the store. Afternoon and evening transactions rose 19%. Starbucks now owns the morning, going big on lunch and attacking the midday refreshment and snack side of the business. The evening wine and cheese crowd is next on the agenda. Last quarter, food added 3% to same store sales, which was considerably better than in the past.

New store expansion is coming from overseas. In fiscal 2007, 70% of new store developments were inside the United States. Starbucks expects 70% of its new 1,800 new stores will be outside the U.S.

In addition to opening new stores, the company is aggressively attacking the grocery isle. According to the company, 80% of coffee "occasions" happen outside a coffee shop, so expanding distribution of ground coffee and k-cups remains a big priority. To support those sales, Starbucks has over 500 "signature aisles" in grocery stores and is looking for more. Of course, the company continues its push overseas. It has a $6 billion coffee and energy drink partnership with Chinese coffee company Tingyi and a $4 billion initiative with PepsiCo in Latin America.

Last quarter, some investors thought management gave mixed guidance. The company said sales would be strong, but earnings per share would be below the consensus because of heavy investment in technology. For example, digital initiatives are consuming an estimated $250-$275 million or $0.04-$0.05 per share this quarter.

Starbucks has a unique digital ecosystem. Mobile payments are at 21% of sales. About 35% of sales are prepaid cards. Last year, there were $5 billion loaded on cards and over 10 million active loyalty card members.

For the first quarter, analysts are expecting revenue of $5.39 billion, up 12% and $0.45 in earnings. For the year, revenue should be up 12.9% to $21.6 billion. The year includes an extra week, but that extra revenue will be offset by foreign currency translation. Earnings of $1.89 include some modest share buybacks.

Just about every analyst has a buy or strong buy on the stock and the average target price is $68. As mentioned before, higher technology spending, increased employee-related expenses, higher store opening expenses and foreign currency could take a cut a few cents out of EPS, but given the company's strong momentum, it's hard to bet against Starbucks. The company is on caffeine high.