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Starbucks Investment: Stock vs. Franchise (SBUX) By Dan Moskowitz
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If you want to invest in Starbucks Corp. (SBUX) you have two logical options - buy its stock or franchise out a Starbucks location of your own. Or can you? (For more, see: How did Howard Schultz Build Starbucks from a Small Business into an Empire?)
Starbucks Stock
Starbucks is currently trading at $93.58 per share. It went public in 1992 at $17. Since that time, the stock has split (2-for-1) five times. It has also appreciated 101.6% over the past three years. A debt-to-equity ratio of just 0.34 and a dividend yield of 1.40% are also appealing. Starbucks delivered record revenue in its first quarter in fiscal 2015. Revenue jumped 13% year over year to $4.8 billion. Non-GAAP earnings per share also increased 16% to $0.80. Those are both important numbers, but it’s the comps that you really want to pay attention to since it excludes new store openings. Fortunately, that number was also impressive. Global comps increased 5% year over year. Breaking that number down:
Comps
Transactions
Change in Ticket
Americas
Up 5%
Up 2%
Up 3%
EMEA (Europe, Middle East, Africa)
Up 4%
Up 3%
Up 1%
China, Asia-Pacific
Up 8%
Up 8%
Flat
Those are solid numbers. Additionally, in the first quarter in the United States, one of every seven Americans received a Starbucks gift card – up from one in every eight Americans in the year-ago quarter. For FY2015, Starbucks expects revenue to increase between 16% and 18%. Comps are expected to increase in the mid-single digits. Non-GAAP earnings is expected to come in between $3.09 and $3.13. And Starbucks plans on opening 1,650 new stores. (For more, see: Giving Your Portfolio a Jolt with Coffee.)
All of the above numbers are impressive, and with approximately 37% of the U.S. coffee market, Starbucks isn’t going anywhere. On the other hand, you always need to look at every detail prior to putting your money to work, and there’s one detail you simply can’t overlook. In September 2006, Starbucks’ stock closed at a high of $37.75. In February 2009, near the bottom of the financial crisis, it closed at a high of $9.15, which proves the stock proved is not resilient in any way. The reason for that is simple. Most Starbucks locations are in high-end areas, and the majority of people who live and work in those areas rely at least partially on investments for income. When the market crashed, those people lost significant portions of their net worth. One immediate reaction was to cut costs. This, in turn, hurt Starbucks, which charges a premium for its coffee.
There is no telling what will happen in the future. But if the Bernanke/Yellen low interest rate experiment goes as well as the Greenspan low interest rate experiment, this won’t end well. Nothing appreciates forever. If that scenario plays out, Starbucks and its stock won’t be as in demand as right now. Fortunately, this scenario hasn’t played out yet. And even if that were to be the case, Starbucks is an extremely powerful brand. An investor who played his cards well would initiate a small position at any time while saving the majority of his/her capital to invest at much cheaper prices, if those cheaper prices were to be available in the future. If Starbucks continues to appreciate with the broader market, then it would still be a small win. (For more, see: Janet Yellen vs. Alan Greenspan: Who Is the Better Fed Head?)
Investing in a Franchise
Would investing in a Starbucks franchise be a better option? Sorry, but you can’t. At least not at the moment. However, Starbucks has been on again/off again offering franchises in Europe. There are serious requirements. You need to prove at least $700,000 in liquid assets, have food and beverage experience and currently run a multi-site business. And you also need to move to Europe.
If you would prefer to stay in the United States, there’s another option. You can invest in another Starbucks’ banner – Seattle’s Best Coffee. Investment totals range depending on location, marketing, development fees and more. For a basic idea, if you invest in a cafe, you will need between $250,000 and $450,000, a drive thru $367,000-$491,000 and for a kiosk $178,000-$400,000. (For more, see: Is Buying a Franchise Wise?)
If you do things the franchisor’s way, then you will likely end up with a profitable investment over the long haul. But you’re going to need to sell a lot of coffee to get there and keep in mind that you will pay 7% in royalties and will have to contribute to marketing. You will also likely need to work seven days per week. Unfortunately, there’s no concrete information on how long it will take to be profitable. This will largely depend on the dedication and leadership of the person running the store as well as the location.
The Bottom Line
Both options present risks and potential rewards. If time is valuable to you, investing in the stock will be a better option. If you like the hands-on approach, consider a Seattle’s Best Coffee location. (For more, see: When Is a Franchise the Right Investment for You?)
Dan Moskowitz does not have any positions in SBUX.
Read more: Starbucks Investment: Stock vs. Franchise (SBUX) | Investopedia https://www.investopedia.com/articles/active-trading/041515/starbucks-investment-stock-vs-franchise-sbux.asp#ixzz5V9IBZyoF
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