Hot Stocks: A Quick Turnaround and Global Expansion Plans Giving Starbucks Stock a Jolt

A massive Asian expansion and a heated debate over gun rights are just a few of the things going on at Starbucks Corp. (Nasdaq: SBUX) these days. But despite the tension that's percolating in the world's largest purveyor of designer coffees, Starbucks is in the midst of an impressive turnaround.

Years of rapidly adding new stores forced the company into a stark retrenchment when the economy soured. One thousand of the trendy coffee shops were closed and many more employees let go. Starbucks stock plunged more than 80% from its 2007 peak of about $40 a share to under $8 a share in November 2008.

But the company's restructuring - which shaved roughly $600 million in costs - and an improved economy have provided a refreshing jolt. Starbucks in January reported its first quarter of same-store sales growth since the end of 2008. And its share price has bounced back to a respectable $24.84 a share as of yesterday's (Wednesday) close.

The days of reckless overexpansion and troubling closures are have come to an end, insists Starbucks Chief Executive Officer Howard Schultz.

"We cleansed ourselves of that, and we began to understand that not only could we admit mistakes, but that we could start righting the ship," Schultz said during a meeting in Seattle, which was broadcast over the Internet. "We have loads of opportunity to grow the company, but perhaps in a different way."

Schultz's new game plan calls for expanding its presence in the fast-growing Asian market - but doing so carefully.

"Asia clearly represents the most significant growth opportunity on a go-forward basis," he said in an interview with The Wall Street Journal. "Over time there will be thousands of stores in China, but it's a complicated market that requires significant discipline and thoughtfulness."

Starbucks first entered China in 1999, just three years after opening its first shop in Japan. Still, the company has less than half as many stores in China as it does in Japan (376 stores in China vs. 878 in Japan).

China, traditionally a tea-drinking nation, looks to be following a pattern similar to that seen in Japan a few years ago. After a steady climb, Japan is now the world's third-largest coffee importer. According to the International Coffee Organization, China's current import volume is less than a tenth of Japan's, but coffee consumption is growing at an unparalleled rate of 10% to 15% each year. And with a population of 1.3 billion, it won't be long before China leapfrogs Japan and Germany to become the No. 2 coffee consumer in the world.

So while Starbucks will continue to pursue growth in Japan - the company yesterday began selling Via Ready Brew, its powdered coffee mix, in Japan - it's more keen to expand in other Asian markets where its brand is less established.

"India and Vietnam are two markets we'd like to get to at some point," said Schultz. "We are still at the embryonic stages of what Asia will be for the company."

For now, though, Japan remains Starbucks' largest market outside of North America. Total sales in Japan for the current fiscal year ended March 31 are forecast to have stayed flat at about $1.03 billion (96.4 billion yen), according to The Journal. Same-store sales in the country rose for the first time in 15 months in February, and the company aims to open 50-60 more stores there this year.

A Triple Grande Latte with a Side of Ammo

Back home in the United States, Starbucks is trying to be as evasive as possible in ducking a conflict between advocates of "open carry" gun rights and gun control.

In California, small groups of gun-wielding gun rights advocates, notably members of the loosely organized "Bay Area Open Carry Movement," have been meeting at various locations across the state, including Starbucks.

California allows its citizens to openly display and carry unloaded weapons without a permit, as do Utah and North Dakota. The guns cannot be loaded, but persons can carry ammunition so long as it is kept separate from the firearm. Private businesses are typically allowed to ban guns from their property, but Starbucks does not.

Instead, the company says it intends to "comply with local laws and statutes" and that the "political, policy, and legal debates around these issues belong in the legislatures and courts, not in our stores."

That stance has won praise from open carry advocates but drawn criticism from customers expecting a more relaxed atmosphere. Specifically, Starbucks has come under fire from the Brady Campaign to Prevent Gun Violence, which is soliciting signatures on a petition to keep bullets and baristas away from one another.

The situation is a potentially combustible one, but Starbucks is no stranger to controversy. Critics allege the company has undercut smaller businesses by saturating the market, intentionally operating at a loss, and buying out competitors' leases. Starbucks has also been the focus of labor disputes, criticized for its spotty environmental record, and in the United Kingdom, accused of violating planning and zoning laws.

Still, Starbucks has appeared on the Ethisphere Institute's list of the World's Most Ethical Companies since 2007. Ethisphere says companies on this year's list have outperformed the market by delivering a 53% return since 2005, compared to a 4% decline for the Standard & Poor's 500 Index.

And regardless of any criticism, gun-related or otherwise, Starbucks is enjoying a strong rebound. Its stock is up 7.3% year-to-date and the company said last month that it would pay out its first ever cash dividend on April 23. A dividend of 10 cents per share will paid to investors on record as of April 7.

CEO Schultz stands to receive $7.7 million on 19.4 million shares of Starbucks stock he owns through direct and indirect holdings.

Additionally, Starbucks is expanding its share buyback program. The board has authorized the repurchase of up to 15 million shares of stock on top of the 6.3 million shares that remain to be bought through an earlier plan.

The dividend and buy back program reflect Starbucks' "evolution into a more mature, less capital intensive growth company," Bernstein Research analyst Sara Senatore said in a research note. "Hoarding cash just went out of style."

Starbucks is sitting on $1.3 billion in cash, and more is on the way as free cash flow is forecast to be $1 billion this year.

News and Related Links:

• Wall Street Journal:
  Starbucks Plans Major China Expansion
• Money Morning:
  The Price of Coffee is on the Rise: Who's Really Going To Profit?
  
• Money Morning:
  New China Mall Devoted to Such Knock-Off Brands as "Bucksstar" Coffee, "Pizza Huh" Slices and "McDnoald's" Burgers