Starbucks' Profit-Sharing Venture Makes It an Even Better Investment
Sep 27th 2012 11:37AM
Updated Sep 27th 2012 11:42AM
Consumers are becoming more and more socially conscious, and want the goods and services they use to measure up. It doesn't take much. A simple action that costs a company very little or nothing at all can make a real difference in the mind of the consumer -- and in the company's bottom line.
Starbucks (NAS: SBUX) has repeatedly shown it can go beyond the call of duty when it comes to corporate social responsibility, but I'm particularly impressed with the company's new profit-sharing Community Stores. Let's have a look at this innovative program, and also take a hard look at the numbers. We'll analyze the company in terms of its performance as a socially conscious enterprise, as a business, and as an investment.
3 Starbucks cafes now sharing profits with local communities
There are companies that are good at talking the talk of corporate social responsibility, but not necessarily walking the walk. Starbucks should be held up as a role model for both.
The company just announced the opening of its third profit-sharing community store in the East End community of Houston. The other two community stores are in Los Angeles and New York. A share of the profits from each store goes to specific organizations that serve the needs of the citizens in each community. In Houston, the money goes to The Association for the Advancement of Mexican Americans, which helps disadvantaged and at-risk youth in the East End. The grand opening comes on the one-year anniversary of the Starbucks Community Store pilot program.
Whether it's sourcing raw coffee beans in an ethical manner, standing firm on employee health care benefits even in tough times, or saving American jobs by "insourcing" a line of coffee mugs, the ever-profitable Starbucks aptly demonstrates how a company can turn a profit while helping to turn the world around.
Have a latte, with a shot of impressive growth
Now let's look at a few basic metrics and see how Starbucks measures up as a business and an investment against its peers:
Revenue growth: In its most recent quarter, Starbucks grew its revenue by 13% year over year: a top-of-the-class performance, one matching Yum! Brands' (NYS: YUM) YOY growth exactly. Traditional rival Dunkin' Brands (NAS: DNKN) came in at a very respectable 10% on this metric, while the usually formidable McDonald's (NYS: MCD) was dead flat.
Earnings growth: Year-over-year earnings growth for Starbucks was a big 19.3%, while earnings over at McDonald's are actually down YOY, by 4.5%. Yum!, in the meantime, is up by 4.7% YOY, and so is Dunkin: a respectable 7.8%.
Cash-to-debt ratio: It's always good to see more cash than debt on the balance sheet, ideally at least 1.5 times more.
- With $2.5 billion in cash and $550 million in debt, Starbucks' C/D is a lovely 4.5.
- With $2.5 billion in cash and $13.57 billion in debt, McDonald's C/D is a lousy 0.18.
- $989 million in cash and $3.31 billion in debt give Yum! a slightly better but still lousy C/D of 0.3.
- Finally, Dunkin' has $218.7 million of cash on hand and $1.47 billion of debt, giving it a C/D of 0.15.
With lending rates as cheap as they are, lots of companies are highly leveraged these days -- too many companies. And while interest payments are low, it's still never a good idea to have more debt than cash. This makes Starbucks' cash-to-debt position all the more laudable.
Price-to-earnings ratio: At 28, Starbucks isn't cheap by normal valuation standards, but Dunkin's P/E is 72. Of the two highest-flyers in the bunch, and the two who are the closest rivals, Starbucks is a steal. (Though do bear in mind that, once you back out one-time charges, buried deep in the income statement, Dunkin's P/E is actually closer to 53 -- still high, but not 72-high.)
Making money while making a difference
"This is an important moment for Starbucks," Chief Community Officer Blair Taylor said in a statement. "By expanding upon our Community Store model with this third location in Houston, our hope is that as we continue to embrace the opportunity we have to support the rebuilding of the neighborhoods that we serve, we can inspire other like-minded corporations to do the same, creating long term, sustainable impact."
Well put. Of course, Starbucks isn't perfect in this regard, but are any companies? To paraphrase Voltaire, however, it's important to never let the quest for the perfect drive out the good. Learn about three more companies set to dominate retail, one with its own impressive oeuvre of socially responsible moves, in this free Motley Fool special report, aptly titled "3 Companies Ready to Rule Retail." To get your copy while the stocks are still hot, simply click here now.
The article Starbucks' Profit-Sharing Venture Makes It an Even Better Investment originally appeared on Fool.com.Fool contributor John Grgurich quotes Voltaire whenever he gets the chance, though his German shepherd prefers Nietzsche. Neither owns shares of any of the companies mentioned in this column. Follow John's dispatches from the bleeding edge of capitalism on Twitter @TMFGrgurich.The Motley Fool owns shares of Starbucks and McDonald's. Motley Fool newsletter services have recommended buying shares of Starbucks and McDonald's. Motley Fool newsletter services have recommended writing naked calls on Dunkin' Brands Group and writing covered calls on Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a positively scintillating disclosure policy.
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