TEA Teavana Holdings, Inc.

World’s biggest coffee company Starbucks Corporation (SBUX) recently announced its long-term objectives pertaining to store expansion and growth strategies for each of its segments; its entry into the tea industry and its initiatives to boost consumer relations. The company plans to take the following steps to ensure growth in the upcoming fiscal years.

Segment Specific Plans

The Americas business has witnessed a substantial turnaround since the last couple of years. The segment witnessed 9% growth in net sales to $2.5 billion in the fourth quarter of 2012, driven by 7% growth in same-store sales and new store openings.

The company intends to open more than 3,000 new stores and remodel many more in the next five years in order to capitalize on the strong demand for Starbucks products in America. By the end of 2013, Starbucks customers in the U.S will be able to enjoy La Boulange products and Evolution Fresh juices in company-operated stores.

Starbucks has also been witnessing strong performance in the China-Asia-Pacific (CAP) segment. In fact, net revenue grew 28% in the fourth quarter of 2012, driven by a 10% rise in same-store sales and new store openings. China, Thailand, Singapore and Australia all posted strong performances.

The company believes China will become its second-largest market by 2014, surpassing Canada. The segment will have 4,000 stores by the end of 2013, of which 1,000 will be in Mainland China, 1,000 in Japan and 500 in Korea.

China is one of the most important markets for Starbucks and the company plans to have 1,500 stores in 70 cities in 2015. Starbucks has opened its first three stores in India and plans to open a fourth store in early 2013. The company also intends to open its first store in Vietnam.  

Europe, Middle East and Africa segment witnessed a 2% decline in net revenue to $283.7 million in the fourth quarter of 2012, hurt by flat traffic and currency headwinds. However, revenue and profit is expected to improve significantly over the next five years. Also, the company intends to focus on brand building, generating more revenue from the existing stores and increasing licensing agreements.

The Consumer Packaged Goods (CPG) (formerly known as Channel Development (CD)) segment includes the U.S. Foodservice business and also sells whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages, Starbucks VIA Ready Brew, Starbucks coffee and Tazo tea K-Cup packs, and Starbucks super-premium ice creams.

This high-margin, high return on capital business reported 32% revenue growth in the fourth quarter of 2012, fueled mainly by higher sales of Starbucks branded K-Cup portion packs, which are fast gaining traction. The international footprint of this segment is expected to double by 2015. Starbucks plans to build 100,000 distributions centers in 20 countries. A customer loyalty program, My Starbucks Rewards, will also be introduced in 2013.  

Plans Regarding Teavana Acquisition

On November 14, 2012, Starbucks agreed to acquire Atlanta-based tea store chain Teavana Holdings, Inc. (TEA) for approximately $620 million in cash. The acquisition will bring together Starbucks’ expertise in real estate, style and store management and Teavana’s competencies in global tea industry.

Teavana operates through 300 mall-based stores, which Starbucks plans to expand as well as establish new standalone Teavana neighborhood stores domestically as well as internationally.

The acquisition will enable Starbucks to expand in the $40 billion global tea market and claim a leading position. Starbucks is constantly on the lookout for new additions to its product portfolio, other than coffee, like La Boulange products and Evolution Fresh juices. Teavana is another step in that direction.

Connecting with Consumers

Starbucks connects with its consumers through its social, Internet, mobile, loyalty and cards programs. Starbucks cards are now used for 25% of the transactions in the U.S and the money loaded on the cards grew over 20%. The company expects 10% of the payments to be made using the mobile application by the end of fiscal 2013.

We are positive about the company’s long-term plans. We appreciate Starbucks’ strong market position, new product launches, rapid growth in China as well as a solid turnaround in its U.S. business.

Following the solid fourth quarter results, Starbucks upped its forecast for earnings, operating margins and global net new stores for fiscal 2013. However, poor sales in Europe due to depressed macroeconomic conditions keep us on the sidelines.

Starbucks carries a Zacks #2 Rank in the near term (Buy rating). Currently, we have a Neutral recommendation on Starbucks over the long term.

 
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