Author Topic: SBUX - Starbucks Corp  (Read 11056 times)

johnny

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Re: SBUX - Starbucks Corp
« Reply #60 on: March 10, 2017, 02:29:56 PM »
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

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Re: SBUX - Starbucks Corp
« Reply #61 on: March 20, 2017, 01:53:27 PM »
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.