When a company significantly outperforms an industry, it is a good idea to take notice -- and try and find some stock ideas based on the results.
The company that just trounced industry rivals is none other than Action Alerts PLUS charitable trust holding, Starbucks (SBUX). Given the company's size in the U.S., and the economy's slowdown since the summer, it is a significant milestone to generate an 8% same-store sales increase. Starbucks isn't some hot, new growth retailer, it's Starbucks. It has been around seemingly forever -- at least to Millennials, like myself. But what the coffee outfit's results show is that, led by Howard Schultz, it is still finding ways to act as a growth retailer.
A couple examples of where growth is coming from:
- A consistent barrage of seasonal tea and coffee drinks that are priced at a premium to the core menu.
- A consistent barrage of new lunch options (bistro boxes, mostly), and also breakfast items (such as bite-sized bagels filled with cream cheese). The items are positioned in cases that customers must pass to pay for their coffee (and the cases use inviting lighting), which, in my view, is helping to spur attachment to coffee and tea. Remember, for years investors owned Starbucks simply because it sold premium coffee that people couldn't get enough of. Now, Starbucks is becoming a quick service restaurant.
- The complimentary offerings at Starbucks -- such as mugs, travel mugs and assorted snacks -- have greatly improved. In other words, the company has become a better merchandiser.
- The company has found a way to get even more sites up and running -- in different, more profitable, formats -- around the globe. I believe that, over the next 3 years, you will see Starbucks partner with outside retailers in some way to better leverage its significant real estate. For example, in some of the larger, flagship Starbucks outlets, I would not be surprised to see Apple Watch shops. It would make sense: Apple Watch is a premium product and more sales could boost mobile buying on the Starbucks app (which, by then, will have suggested selling functionality).
Indeed, Starbucks' stellar rates of U.S. sales growth, this year, offers clues on what to except with several comparable companies.
Dunkin' Brands (DNKN): the company has had a challenging investor narrative for the past 6 months. Sales at Dunkin' in the U.S. have slowed, and in early October the company issued a sales warning amid declining store traffic. These are not happening at Starbucks, but could be a byproduct of Starbucks' success. Consumers are choosing to purchase what Starbucks is offering -- tea, coffee, and food -- instead of paying more (to compensate for higher minimum wages) for what Dunkin' Brands is serving.
Furthermore, Starbucks continues to be the market-share leader in K-cups as a result of consistently unveiling new flavors. Dunkin' Brands noted it had a soft quarter in K-Cups sold inside of its restaurants. Also, Starbucks' success in K-Cups suggests Dunkin's important rollout of K-Cups in supermarkets may not produce the type of results investors expected when the deal was announced earlier this year.
With Starbucks coming out swinging this holiday season, introducing new holiday drinks and merchandise, I would be concerned on what Dunkin' can produce in terms of sales and profits. If Dunkin' can't get consumers to pay more for its key new items -- as opposed to having them visit Starbucks for their daily ritual -- it leaves the company exposed to competing on price with McDonald's (MCD), Burger King (BKW) and Tim Horton's. That is not a good place to be hanging out.
Shake Shack (SHAK): Starbucks' U.S. results told investors that consumers -- despite waning confidence of late -- will continue to pay more for premium experiences. One of the more premium names in the restaurant business is Shake Shack, which I think had several things in its favor during the quarter that is soon to be reported. First, the weather in the past few months has been warmer than the norm, which is good news for Shake Shack restaurants, given their large amount of outdoor seating (for example, in the company's key Madison Square Park location). Second, the company had some strong limited-time offerings in the marketplace -- and consumers have consistently loved Shake Shack's limited-time sandwiches.
Working against an investment in Shake Shack is its pressured stock price in recent months -- due to insiders filing to possibly unload shares. However, I think the raw numbers from the third quarter will be very strong, as will the narrative on its earnings call -- in discussing the rollout of the new, well-received ChickenShack sandwich, and discussion of growth plans for 2016. I believe that if the company pulls these things off, it may begin to lessen concern that insiders are going to dump a wave of shares over the next twelve months based on worries about the company's future.
Chipotle (CMG): The king of better burritos had a disappointing third quarter, as sales slowed considerably on the year, and to a lesser extent, sequentially. Starbucks results suggest that with consumer confidence a little weaker right now, people are choosing more carefully where they are going to splurge for premium eating experiences. I am not too sure if, in this macro environment, and considering price increases both companies have taken, Chipotle can produce strong sales at the same time Starbucks is producing mind-blowing results. Hence, consumer confidence may have to firm up, and job growth reaccelerate, to get Chipotle's stock working again on the premise its sales could regain traction while Starbucks continues to rock.