Normally talking about “liquid meals” is something reserved for college students, but the reality is that Starbucks (Nasdaq:SBUX) has long since proven that there's room in the quick service restaurant (QSR) for something other than burgers and sandwiches. Starbucks has likewise capitalized on the brand value it built through its stores by establishing a significant retail/commercial presence that few restaurants come close to matching.

I don't want to make the mistake of underestimating what Starbucks can become. There's still ample room for store expansion in much of the world, not to mention additional products in the retail channel and follow-on markets like teas and pastries.

The only question I have is what this is all worth. On one hand, Starbucks doesn't seem priced all that out of line with successful QSR operators like McDonald's (NYSE:MCD), Chipotle (NYSE:CMG), or Dunkin' (Nasdaq:DNKN), nor successful packaged food and beverage companies like Coca-Cola (NYSE:KO), Mondelez (Nasdaq:MDLZ), and Nestle (OTC:NSRGY). On the other hand, investors have to either expect strong high-teens free cash flow (FCF) growth for at least another decade or accept relatively unimpressive expected annual returns for today's valuation to make a lot of sense.

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The Growth Continues In Q1
While much of the U.S. (and frankly, the global) QSR marketplace is struggling to entice more customers through the door, that doesn't seem to be a major problem for Starbucks. Revenue rose 11% this quarter, with retail sales up 11% on a 6% improvement in comp store sales. U.S. comp growth was slightly better (up 7% on 5% higher traffic), making Starbucks one of the strongest comp-growth stories in the U.S.

Margins also continue to come along nicely. Gross margin improved more than a point from the year ago period, though they did fall slightly on a sequential basis. Likewise, operating income rose 26% from the year-ago period and the operating margin improved almost two points, but fell more than a point sequentially. While all of this is quite good on a relative basis, it wasn't enough to surpass expectations, and the stock may show some weakness on this lack of a beat.

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Still Room To Do Better
Having posting returns on invested capital above 20% for five of the last ten years and grown free cash flow at a compound annual growth rate (CAGR) of over 17%, it's a little difficult sometimes to seriously take Starbucks management to task. That said, there are places where the company could do better.

While margins in the U.S. are good and margins in Asia are great, margins in the European segment are still weak. Management has been shifting its store portfolio towards more licensed stores, but I still believe there is substantial room for better performance here.

I also believe Starbucks can do more in the consumer area. Starbucks' K-cup efforts have been solid, and the company is a viable rival to Green Mountain (Nasdaq:GMCR) and Nestle, but I feel like the company has been relatively restrained in pushing these offerings. There's nothing wrong with Starbucks maintaining a focus on its stores, but I do think the opportunity to do better here (and reap better margins and returns) should be an easy layup for management.

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The Bottom Line
A well-run company that has the opportunity to do even better is a pretty attractive prospect in its own right. The unfortunate bit here is that the Street already expects quite a lot from this company and the stock. For today's share price to make sense, the company must either grow at a rate faster than it managed over the past decade or shareholders must be content with less annual expected total return. The latter is most likely the case, as investors have shown clearly that they are willing to pay a premium for the growth offered by strong consumer brands. In any case, I find it hard to accept the price of Starbucks today and I wouldn't look to be adding shares at these levels.

At the time of writing, Stephen D. Simpson did not own shares of any for the companies mentioned in this article.