Starbucks: Buy the Brand, not the Fundamentals

Let's just start with some full disclosure here. I am currently sitting on my balcony, feet resting up on a hammock that hangs next to me, enjoying a breeze coming in from the East as a thunderstorm approaches. I like to do this in the evening while I read or write and many times I do this with a coffee in hand. Currently it is a Starbucks that I received free with my Rewards points. Yes I spent enough to get free caffeine. Yes I can't believe it either. And yes I have a confession...

My name is Cory and I am a coff-a-holic. There...I said it. I own a coffee machine that grinds the beans (burr grinder, yes I'm a snob) and drops them into the filter, all the while filling my home with a rich aroma of whatever roast I have selected. It then dumps it into a thermal carafe that holds the heat in for me so that I can have a hot cup up until I finish the whole pot.

All of this coffee drinking got me thinking about what is actually going on at the largest coffee chain in the world...

When you take a look at Starbucks' fundamentals there isn't anything that really pops out at you and screams buy. The P/E ratio stands at an above average 29.92, the price to sales at almost 4, and a dividend of only 1.7%.  On top of this the same store growth seems to be slowing and they are having problems filling mobile orders. Add in a guidance that has been reduced and there isn't a lot to love.

...but while the fundamentals speak one language, it seems that Starbucks' is speaking another.

It's All about the Experience

Just before I was writing this I checked the web for some news and saw this:

Source: Starbucks

Source: Starbucks

That my friends is what Starbucks is calling the "Unicorn". It is a drink that can be purchased off a "secret" menu, one only known through web chatter and social media postings, for a limited time this week. This secret menu seems to have a cult following that posts endless recipes and items to various sites so that you can get in the proverbial backdoor. 

This is one way that Starbucks is creating an experience that makes you want to walk into a store.

In what seems to be an age that is dominated by social media and technology Starbucks is working towards creating a space for millennials to congregate and socialize, much like arcades and bowling alleys did in the 1980's. Coffee is becoming a social event with the younger generation and Starbucks seems to be aimed on capitalizing on this.

Reserve Stores & Roasteries

If you would have asked many people in the United States ten years ago if they would pay $4+ for a cup of coffee the answer would have probably been a hard no. Now it seems that not only are people willing to shell out exorbitant prices for coffee, they almost flock to it. Starbucks must see some major opportunity here because they are launching an all out war on quality and experience. 



The newest additions to the Starbucks experience will included Reserve stores and Roasteries. The Reserve stores, that look like a mix between a science lab and steampunk convention, will sell small batch coffee as well as fresh food and also spirits. The goal is to make a premium location that because a total event not a quick dash for a pick me up.  This could be exactly what Starbucks is looking for to rejuvenate growth. Plus with a tall reserve coffee running $4 (regular blonde roast runs $2.20 down here in FL) it makes for a profit margin that should be very favorable.



As the Reserve stores are being built so will the Roasteries. These locations (4 to launch by end of year 2018) will include Starbucks Certified Coffee Masters, a library with books about coffee, a roasting operation, and coffee bar with multiple different coffee-making methods to choose from. CEO Howard Schultz has not only been noting the experience that will be expanded upon for the customer but also that these have/will become breaking grounds to new innovations for the company. This is already the place where the Nitro Cold Brew, Cascara Latte, and a Barrel Aged Reserve brew has already been concocted. These types of advances are sure to keep Starbucks ahead of the game and is somewhat remnant to when Sam Adams started the craft brew phenomenon that got us paying $20 for a six pack.

Technology Gets Personal



Enhancing the experience even further is the now the Starbucks app that continues to improve both efficiency and sales. According to Starbucks there is currently 13 million Reward members, 9 million mobile payers, and 3 million that use the order and pay feature. To take this even further the company recently announced a partnership with Amazon Alexa for voice ordering and with Ford for blue-tooth enabled in car ordering (also through Alexa). This takes the experience and ease of use to another level. 

Want your tech even more personal though? Starbucks is currently testing a feature called "My Starbucks Barista" which is a part of the mobile app and basically is an AI version of your local barista. This not only makes it much more personal but also opens up orders to voice and text instructions. Want a white chocolate mocha with no whip and an extra shot of espresso? Just speak to the app and you will get it done in seconds. 

My Opinion

While I look at Starbucks from a Graham methodology and I see a company that is overvalued and not pushing me to add shares. When I really begin to step back and look at what the brand is becoming and creating, I believe that I may need to begin a position. This to me seems like Coke to Buffet, a brand that is dominating a space and I believe will continue to for much time to come. Throw in a potential for consistent dividend growth and I really begin to like the prospects. Now how about we start talking about the future of the stores in China (this is a whole other article) and the dominoes begin to fall in favor of the coffee giant. 

Overall I believe that there could be some hard times as Starbucks begins to venture into new, never seen before spaces, but with risk comes reward and that is truly the only way to change an industry.

With that I must say:

Starbucks is a BUY.



Disclosure: I have no position in any stocks mentioned, and no plans to initiate any positions within the next 72 hours..

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.