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Determined to expand in the fast growing Chinese markets, Starbucks Corp. (SBUX - Analyst Report) has planned to triple its store count in that region. Starbucks believes that China will become its second-largest market by 2014.

Starbucks, which had opened its first Chinese store in 1999, currently runs more than 570 outlets across 48 Chinese cities. In fiscal 2011 alone, the company opened approximately one store every four days on an average, and opened stores in 13 new cities. Now, the company is confident to take the store count beyond 1,500 in China by 2015.

The retail giants are getting attracted to the emerging markets of China and India among others, owing to the challenging macro-economic conditions and the saturated markets of developed nations like US and Europe. The economic outlook of these fast growing nations is at present much better than the developed markets due to the improving standard of living of the middle class.

Separately, Starbucks is also looking to revive the company’s sluggish business growth in Europe by enhancing its presence in the continent. As part of this strategy, the company will increase its number of stores operating in the UK from 760 to 1,060 over the next five years. Earlier, the company’s business had suffered in the European region, as management’s focus to bring US business on track caused them to neglect this region. However, the growth in Europe has now become a much bigger priority for the coffee chain.

Our recommendation

We currently have a Neutral recommendation on Starbucks. The stock looks more appealing for the near term with a Zacks #2 Rank, translating into a ‘Buy’ rating.

Continuous product innovation and expansion into new geographic territories have always helped the company to maintain decent earnings growth. However, intense competition from peers like Dunkin Brands (DNKN - Snapshot Report), McDonald's (MCD - Analyst Report), and Green Mountain Coffee Roasters, Inc (GMCR - Analyst Report) coupled with high coffee prices on account of bad weather conditions and an abnormal increase in farming costs induce us to maintain a sideline view on the stock.

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