Coffee prices recently hit the highest level in 10 years, but Bank of America analyst Sara Senatore said Monday that Starbucks Corporation (SBUX) investors shouldn't sweat coffee inflation.

Hot Coffee:

Coffee futures prices are hovering around $2.30 per pound, up about 90% from a year ago.

Senatore said rising coffee prices are making Starbucks investors increasingly concerned about potential margin pressures, but she said coffee prices are a relatively small portion of Starbucks' total input costs. Coffee represents between 15% and 20% of Starbucks' Sales +Occupancy costs and between 6% and 8% of its revenue.

Starbucks has long-term relationships with coffee suppliers and locks in prices at least one year in advance. These relationships allow Starbucks the flexibility to lock in more coffee when prices are low and less when they are high, Senatore said.

"After mistiming the coffee market in 2011, Starbucks has proven more adept at purchasing," she said.

Photo by Coffee Geek on Unsplash

How To Play It:

In fact, inflation is driving Food At Home costs higher, which makes Food Away from Home purchases, including coffee, more attractive for consumers. Senatore said coffee price inflation has outpaced Starbucks' recent price increases, and competitors that do not purchase coffee in advance will likely lead Starbucks to raise prices in 2022.

For now, Senatore said Starbucks shares are trading at a trough three-year earnings multiple and the stock remains an attractive and resilient retail investment.

Bank of America has a Buy rating and a $135 price target for Starbucks.

Benzinga's Take:

Starbucks certainly isn't alone in dealing with rising costs thanks to inflation in commodity prices. But, the company seems to be relatively well-positioned compared to peers thanks to its long-term relationships with suppliers.