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Does Starbucks Still Have Lots of Upside Potential?

It may seem like Starbucks (NASDAQ: SBUX) has rather limited growth potential, and to be fair, there are plenty of U.S. markets that have as many Starbucks stores as they can handle. However, as Fool.com contributors Jon Quast and Matt Frankel explain in this Fool Live clip, recorded on Oct. 25, Starbucks might have more growth potential than you're giving it credit for.

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Jon Quast: I really, really like Starbucks. Obviously, the core business doesn't need any introduction -- coffee. It has been in the business a long time and it has been running at extremely, extremely well. If you look out over the past 30 years, when this thing came public back in the '80s, it was already profitable back then with just the incredibly small store count. Over the last 30 years, opened up over 30,000 locations. Does it consistently where the sales per location, the comparable sales are increasing, it's profitable and it continues to find new ways to grow that top line through opening up new locations.

It's something that is not going away. I think that we look at Starbucks and say, "Oh, well they have 33,000 locations around the world. How much bigger could they possibly get?" Well, Starbucks is looking at and saying, "We can get a lot bigger. In fact, we plan to have 55,000 locations by 2030." That's just a few years away. Thirty years to open up the first 30,000. Now we're going to open up the next 22,000 over the next nine years.

It's an incredible, incredible growth story that's ongoing. Much of this growth anticipated is going to come from China, where there's still opening up hundreds of locations per year. The other thing that's interesting about Starbucks in their growth plans, they're are really back-filling some of their existing markets and saying, "People are liking these delivery-only places a lot more these days, can we get a lot smarter in how we open up locations? We still want to be the place where people go and hang out and drink their coffee. But we also want to optimize for profitability where it makes sense. Maybe we can't operate a huge piece of real estate in the middle of Manhattan, but maybe we can rent this little tiny space that we can fulfill delivery-only orders or take-out-only orders, and improve that profit margin in those locations where it makes sense."

A lot of their new locations over the next 10 years are going to be a mix of these bigger retail locations. The coffee bars where you go and hang out, plus the take-out only locations that are going to be optimized more for profitability. As you look at Starbucks over the last five years in the dividend, right now, terrible yield almost 1.6%. But if you look at it again, this is why this one ranks so high for me over the past five years, essentially doubling the dividend. We're still in growth mode. We're still in hyper-growth mode for opening up new locations.

If they can continue to do that, profitably, I see no reason why earnings can't continue to expand at a pretty quick rate. In so growing those profits. Two, can they continue to increase the dividend payout? This is one that I think gives investors a very nice mix of dividend now, dividend growth, and continued growth of the overall business.

Matt Frankel: I find it difficult to give reasons why people shouldn't buy Starbucks. One thing I would say is Starbucks is very, very good about making more money off of its customers over time. They added accessories to their store like the Starbucks mug that it is sitting on my desk next to me. They added things for kids because they realized smartly that parents often go there with their kids in tow. Now both of my kids want a cake pop every time we go to Starbucks, that turns my six dollar visit into a $12 visit.

The cold drinks they really capitalize on the people who don't want hot coffee in the summer. They really leaned into that. The breakfast items, they are building out lunch items. Some locations even experimented with doing nighttime things, like with beer and wine. They are really good about monetizing their customers. As good as any tech company I've ever seen. Starbucks is as good as at expanding their relationships with their customers. I can't really make a case against it.

Jon Quast owns shares of Starbucks. Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends the following options: short October 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.


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