The New Cola Wars

19:05Stephen:But you can look at some of the similarities and start to do comparisons there. So you still have unit level comparisons. A restaurant is a restaurant is a restaurant. They're going to have food and labor costs. They're going to have rent costs. So you can compare. You can use the KPIs like same store sales or what they call comparable sales to see how has every Dunkin' restaurant done on average versus every Dunkin' restaurant last year. And then you could do the same for Starbucks. And that's how you would compare a Starbucks versus a Dunkin' is by using the comparable sales as a big one to kind of see which one is succeeding and which one's not.

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22:33Andrew:i think and i think starbucks especially for a beginner starbucks would be a hard 10k to look at because at least this year because we were just talking about revenue um starbucks did 37.1 billion in 2025 or no no i'm sorry 2024 uh their 2025 10k is not out yet So in 2024, they did$37.1 billion, and that's their revenue. That's what the beginner is going to see whenever they look at the very top of their 10K is that revenue number, which grew 2.8%. But the net earnings actually tanked by half, and I'm not sure why. I couldn't find why in the 10K, but it fell from 15 % to 7.9%.

23:32Stephen:Yes. And so I've held Starbucks for maybe a year, something like that. I thought it was a great value play. And I still do. I still believe in their rebound story. I just found a better restaurant stock to buy and I put the Starbucks funny in there. But I did write about to value Spotlight subscribers just this past month that they had an operating margin come down and that they've been struggling keeping their profit margins up. So profit margin is a great metric to look at because it can tell you a lot of things. If profit margins go down, for example, you can look at a retailer. If they have so many clothes on clearance, that means they're marking down a bunch of inventory, that makes profit margins go down because profit margins are a percentage.

24:26Stephen:Similar concept with coffee shops, restaurants. If they are not bringing in enough revenue, but they're so overstaffed, that's going to bring down profit margins. What they said in the earnings call, which was not in the 10K, so you get a pass, is they mentioned operating deleverage. So operating leverage is something you want to see in the business. As a business gets bigger, they should be able to earn more revenue on a smaller base and that gives you a leverage. You have the same number of fixed expenses but your revenue is going higher because your business is expanding. You're going to get a multiplier effect on your profits.

25:11Stephen:A deleverage is the flip side of that. And the way that management described it is they said, oh, you know, it's an operating margin deleverage based on struggles. They have a certain terminology for it, but they're basically saying like, hey, our profit margins are down because of deleveraging. And so I was like, that doesn't sound great, but maybe they're turning it around. So I looked at previous earnings calls. They said the same thing. And then another one, the same thing. Even back to 2021, 2020. So pretty much ever since they've had, they've kind of, if you look at a chart, which I have pulled up for Starbucks, they peaked in like 2014, 2015, 2016.

25:58Stephen:That's when profits were the healthiest. Ever since then, it's been this kind of rocky, slow decline. And almost just like on repeat, they blame deleveraging. So at a certain point, you have to ask, like, okay, are you making it sound, you're trying to make it sound like there's a good excuse, but if you're using the same excuse every single quarter, I think that's telling us something different is like your business is not as profitable as it should be. And that's, that's concerning. oh and there's a lot more competition than there used to be you know you got black rifle coffee

26:37Andrew:you got duncan you have all this competition that they didn't used to have so that's probably part of it then you have covid happened you you said you know that they haven't recovered almost from when covid happened um kudos for them to actually be able to stay in business uh through all of that finding ways to make it happen uh but i mean and then now we have the inflation that you know we've talked about several times and all all the inflation the the fed refusing to lower interest rates all that stuff all that stuff is hitting the bottom line of the consumer which we say it all the time you know just cut out or just cut out your daily starbucks and you can afford x right so i mean yeah but i mean also just want to throw out there like that is a solid like attaboy in my opinion when you become yeah a saying like that like just google it you know you've succeeded whenever someone just says just google it and ever the entire world knows exactly what you mean so i mean good on starbucks for that but so i mean do you think starbucks is gonna and i know and you know i guess you don't have to say if you don't really want to but is do you think starbucks will will manage to turn it around or are they going to have to do like dress or is it getting to the point of taking drastic action layoffs store closures things like

28:15Stephen:I hope they do. I believe in Brian Nichol, the new CEO. He came from Chipotle and he went to Starbucks. I think there was a lot that they had to fix there and it seems like they are. And so, yes, the profit margins going from 15 to 7.9 is not ideal. But that's expected because they're doing a lot of things. They're trying to bring the third place element back to the cafes. they went a little too hard in making everything convenient, mobile, drive-through, pickup. Wham, bam, thank you, ma 'am. We're in and we're out. When a lot of the magic behind Starbucks historically has been about, let's go, let's have a coffee, let's get some work done, maybe have a chit-chat, that kind of thing.

29:02Stephen:So they are working towards that. And I think they can. I think they can. But what's hard about that industry right now, all of the stocks in restaurants have been crushed not crushed crushed is a little harsh but they've drastically underperformed in the past year while everything else related to ai has gone up into the right and so it's um it's one of those make or break moments for investors in the in the restaurant space where everybody's feeling uncertain and and you always hear the competition we're throwing around. But it's a hard environment for all restaurants. So you have to ask yourself, are people going to stop going to restaurants?

29:46Stephen:Are they going to stop getting coffee? Is that going to be just people are going to stop doing it for the next 10 years? Or is it more likely that because they are all falling in price, they are all seeing comparable sales pressures, is it something that's just temporary and could provide a good buying opportunity? so I again like I think Starbucks can turn it around I bought them with that idea the turnaround ended up being more painful than I had originally anticipated but I still believe that they will turn it around and I think there's lots of restaurant stocks as we record this in March 2026 that are probably great great buys great deals because of how beaten up this sector is and if you can find one that's like a best in breed best of class restaurant stock and if you can load up into it and hit wink wink then that's something i would highly recommend doing

30:48Andrew:right and uh who i can't remember who is the the founder of starbucks i can't remember his name um howard schultz thank you um howard schultz wasn't that like his big selling point when he started starbucks in the first place and a lot of bankers were telling him no like no one wants to go sit in your little fake italian bistro coffee shop and drink coffee but it turns out people actually did want that and so i find it interesting how when you brought that up like Like, they went really hard on just get it, get out. And actually, the closest Starbucks to me doesn't even have seating anywhere in it.

31:33You can walk in, get your drink after you place an app order.

31:38Andrew:Or you can go through the drive-thru, whichever. But, yeah, so I find that super interesting. point of maybe they do need to go back to that original business model, if you will.

31:54Stephen:I have seen some pictures of what a Starbucks used to look like and how they've remodeled, redesigned it. It just looks from bland corporate cold to warm, cozy inviting. So they are doing it. But you have to imagine at their scale, they have 40 ,000 somewhere in that ballpark units worldwide. You can't just do that overnight. It's going to take some time.

32:27Stephen:I don't have a bone in the fight. I went to Duncan when I was in Brooklyn and I'll go to Starbucks here in Raleigh. All the cult fans of each sorry, I'm down the either uh coffee is coffee so i'm i'm down for either choice so you gave me a pass for not finding the uh the the what was it i forget now the thing in the 10k yeah yeah you gave me a pass

32:59Andrew:i will give you a pass uh for your derogatory slander at coffee and i will not tell evan that you said such horrible things either because coffee is not in fact coffee there there is good

33:16Stephen:coffee and then there's everything else no there is you're right yeah if you had vietnam coffee of course uh yeah the coffee's good yeah that's about as fancy as i've gotten so far is your wardrobe well stocked for the upcoming season change i'm recording and it's the first warm day we've had in a while and I'm realizing my wardrobe isn't as robust as it should be. So I went to Quince and got myself a three pack of 100 % Pima cotton tees. I can't wait to report back to you about how those feel. Quince is all about premium fabrics, considered design, and everyday essentials that feel effortless to wear and dependable even as the seasons change.

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35:14Andrew:I don't even know how we can do the rest of this podcast, but I'll find a way to power through. so we're gonna move on and this is the one that i actually love a lot which really sucks because it's really hard to make a one-to-one comparison just like starbucks and duncan because because these two companies one is just a straight one thing and the other is a big conglomerate but it's funny and i love it because like you want to talk about the dividing line between me and my dad like i'm pretty sure my dad would have banned would rather me abandon all morals all ethics anything he ever taught me growing up than have me shop at costco he freaking hates costco he doesn't know why he hates costco he just likes sam's and that's all there is to it like and there is no debating like dad just come with me to costco it's awesome i'll get you a hot dog you'll love it he's like i can get hot dogs at sam's let's go and so he freaking hates costco and i have no idea why it's just the way it is and so i wanted to throw costco in there and doing research into costco one of the things i didn't realize that just absolutely blew my mind is 65 percent of Costco's entire net profit is subscription fees.

36:44Stephen:Yeah, it might even be higher than that. I guess it depends on what year you're looking at. But yeah, they are a subscription business, which is a completely different way to do retail. I was looking at... I have this pulled up on Fiscal, so I was looking at Sam's Club Revenue, So Sam's Club is owned by Walmart, by the way, if you're not familiar, in stock land. So the revenue for Sam's Club is actually$93 billion in the most recent year. So revenue as much as Pepsi does in revenue, Sam's Club does in revenue every year. that just kind of surprises me because I look at Sam's Club like I don't know maybe there's one or two in every state or something I know there's probably more than that but Sam's Club never really registers on my radar whereas Costco is everywhere it seems like but weird that I don't know if Walmart breaks out revenue for Sam's Club.

38:00Stephen:I guess I should look at that. But it's weird that they are almost as big as Costco in revenue. They have a couple hundred billion to make up. But for how little number of warehouses they have, the revenue is pretty high. yeah they don't break it out i i looked and if they did i couldn't find it um

38:31Andrew:but yeah it just blew my mind that that that's that's costco's pretty much game plan so i mean other the does that is that a worrisome as a investor that a retailer doesn't make its money from retail. Does that make sense?

38:54Stephen:Yeah. I can see where that might be a valid concern for other kinds of companies. But because Costco has intentionally built their business that way, their entire ethos is, we're not going to charge you on what you are buying from us. we're going to pass all of that savings on to you. All you got to do is pay us a membership every year. And that's always been a part of their business model. That's the magic of it, really. That's the only way you're able to go to a Costco and pound for pound get just crazy discounts on stuff as you buy in bulk because they've strategically designed it that way.

39:44Stephen:I don't know if innovative is the right word but this is a very different way of doing things I think it's a great way I wish more businesses thought outside of the box and thought of how can we align ourselves with customers where we still get value and they get value because they're maximizing the value for their customers and the customers are saying thank you by continuing to show up in shop So it's a really strong, powerful moat. I did a thought experiment a couple years ago. I think it was around two years ago where I tried to just in my head think like if I had to pick two or three moats, what would be the strongest that I could think of in my portfolio?

40:32Stephen:And like Costco, it's hard to not put Costco in there. It's hard to even think of what would be a better moat than Costco because the fact that the bigger they get, the more the savings for the members. It's an incredible, incredible, powerful scale economy shared model that they have.

40:54Andrew:It really is. And I don't know. I don't even know what my membership fees are for Costco now. I don't think it's that expensive. and I've never had a Sam's Club membership so I don't know how expensive that one is uh but I do know uh my I think my dad told me his is like 40 bucks or something so it's probably drastically cheaper but I mean at the end of the day Sam's Club is backed by uh Walmart right so sam's club they can pretty much do what they want and not lose money i guess where costco has to play a tighter game does that how does from an investor's standpoint how does that play in your mind the knowing that if costco makes up makes one bad decision that could totally ruin them versus Walmart, they're not going anywhere anytime soon.

42:06Stephen:I've never looked at it that way, I guess, because I don't know what you can screw up. Everybody can screw up something, right? I'm sure they could somehow nuke 500 other warehouses. But they have, I don't know, it's just like a well-operated, well-oiled machine. and there are enough skews out there where you make a pricing mistake on one or two things, you're there for the entire product selection. You're not there for one or two items. So I see your point. I think it's good to think about, but no, it doesn't concern me as an investor.

42:49Andrew:I brought it up because Costco has been in the news recently more than I would like because i i do own costco i have a lot invested in i love costco what can i say but uh it's uh they've been in the news a lot lately with with a couple minor scandals i guess you could call it um and i'm just trying to tell myself like it's all right like they're a powerhouse they're not going nowhere they'll be fine but actually so let's talk about this i think this actually

43:26Stephen:is a great discussion that has broader implications for lots of stocks. So my mom is like the OG Costco shopper. She was there since... I grew up in California, so I'm sure she was there the day they opened. Probably not, but still it seems that way. We were at Costco all the freaking time, and she still goes there a lot. And she has mentioned that there are items now that are not the Costco way, not Costco quality. So I think it is possible that what you're talking about is really happening and that they are slipping or they are not executing like a well-oiled machine like they should, and maybe that is starting to erode customer trust.

44:16Stephen:What's cool about buying stocks that are fundamentally advantaged like Costco is as long as shareholders and the board of directors and management, as long as those checks and balances are in place, where let's say the numbers do go down and they really do lose the Costco way. At that point, maybe the stock comes down, maybe the board of directors gets involved, maybe there's a new CEO. That would naturally work itself out. and you still have the Costco machine embedded into the company. So yeah, there can be somebody who has a misstep and maybe changes things temporarily for the worst. But I think what makes an investment in Costco so unique is that there's nobody who can just build what Costco has overnight.

45:18Stephen:I guess what I'm trying to say is it's Costco's game to lose. And if they make mistakes, they're in the best position to make up for those mistakes and recover on the other side. So even if they do completely screw up, unless you want to argue Sam's Club is on par with Costco, which I wonder if the fact that what you're saying, they haven't had to survive as a standalone, if that actually has been a disadvantage for Sam's Club versus Costco. I misspoke earlier in the episode when I said Sam's Club doesn't have that many warehouses. They actually have 600 and 800 worldwide. And then Costco has 900 worldwide.

46:11Stephen:So size-wise, they are almost very, very similar. But Costco's revenues are almost three times more. So on a per-warehouse basis, Costco is driving insane amounts of revenue compared to Sam's Club. So that whole spiel, I guess, is my staunch defense of why I think Costco will continue to be great because they are just designed better. It is ingrained in their DNA. And yes, every company has their missteps, but they would be the best positioned to make up for those missteps because of everything that they've designed up to now.

46:56Andrew:No, I think that's a great point. But I can tell you one surefire way Costco could put themselves out of business tomorrow.

47:06Stephen:The hot dog?

47:08Andrew:They raised the price of the hot dog, man. Right. that would that would take every single costco goer off promise promise no i love it uh this has been a lot of fun to talk about andrew thank you for for going down the this rabbit hole with me all righty so that's going to wrap it up today everybody thank you so much for uh uh joining us today go ahead and drop in the comments what your favorite brand rivalry is, whether it's Coke versus Pepsi, Costco, Sam's, Barnes & Noble. What was the other bookstore back in the day? Shoot.

47:49Stephen:Borders.

47:50Andrew:Borders. Barnes & Noble Borders, whatever. Starbucks, Dunkin'. Let us know what your favorite brand rivalry is. Maybe Nike Under Armour. We talked about that last week. I'm Under Armour all the way still. I still buy Under Armour stuff. Forget Nike. Anyway, so let us know in the comments, and we'll see you next time. In the meantime, never, ever, ever forget, invest with a margin of safety, emphasis on the safety. See you all next time. Bye.

48:28Stephen:You've been listening to the Investing for Beginners podcast. All show notes can be found on our website at einvestingforbeginners.com. To master the basics of stocks in seven days, sign up for our free email series at einvestingforbeginners.com slash newsletter. Until next time, have a wonderful day. The information contained is for general information and educational purposes only. It is not intended as a substitute for legal, commercial, and or financial advice from a licensed professional. The hosts may own positions in the securities discussed. Review our full disclaimer at einvestingforbeginners.com.

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