We are initiating coverage on Starbucks Corporation (SBUX) with a Neutral recommendation and a target price of $25.50.
Starbucks is the leading roaster and retailer of specialty coffee in the world. The company buys, roasts and sells high-quality whole bean coffees globally. Starbucks’ offerings include fresh, rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, many complementary food items, a selection of premium teas in addition to beverage-related accessories and equipment. These are sold primarily through its retail stores.
Starbucks also sells coffee and tea products and licenses its trademark through various channels. The channels that are not part of the company-operated retail stores are collectively referred to as specialty operations. Starbucks derived 83.7% of total net revenues from its company-operated retail stores during fiscal 2009 (ended September 27, 2009). The balance came from specialty operations.
The company operated 8,800 retail stores at the end of fiscal 2009. Starbucks operates through the following segments: United States, International and Global Consumer Products Group (CPG).
Starbucks has a significant presence in the international market. The company’s international division sells coffee and other beverages, complementary food, whole bean coffees, and coffee brewing equipment and merchandise through company-operated retail stores in Canada, the UK and several other markets.
The total net revenue for the international segment climbed approximately 19.2% year-over-year to $591 million in the most recent quarter. The significant international presence has boosted its growth and we believe will continue doing the same in the coming years.
We are pleased with the wide range of products offered by Starbucks. In addition to its retail operations, the company produces and sells bottled Frappuccino coffee drinks, Starbucks DoubleShot coffee drink, and a line of super premium ice creams. Starbucks’ brand portfolio offers a wide variety of consumer products.
However, we are concerned about the intense competition facing Starbucks. Competitors will always look to grab market share by offering lower prices, new and better services. Furthermore, the dependence of the company on information technology has inherent risks.
Consequently, we do not anticipate a significant upside in the near future and expect the stock to perform in line with the broader market.
“SBUX” Free Stock Analysis: Buy? Sell? Hold?
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