☕ Starbucks Can be a Prime Opportunity. SBUX Stock Analysis
Starbucks (SBUX) is currently at its lowest price in the last 52 weeks, but the projected EPS growth rate indicates a significant improvement. This could be a prime opportunity to consider purchasing.
🧐 Company Overview
Starbucks, founded in 1971, has grown to become the world's largest specialty coffee chain, boasting a network of over 38,000 stores across more than 80 countries as of fiscal 2023. The company's operations are divided into three primary segments: North America, international markets, and channel development.
Starbucks has successfully established itself as a premium coffee provider, generating an impressive $36 billion in sales during fiscal 2023. The company's revenue streams are diverse, encompassing company-operated stores, royalties, equipment and product sales to license partners, ready-to-drink beverages, packaged coffee sales, and single-serve products. This various approach has allowed Starbucks to maintain a strong presence in both the food service and retail sectors, catering to a wide range of consumer preferences and consumption habits.
📰 To Read: About Starbucks
🏰 Economic Moat
Starbucks possesses a wide economic moat, primarily underpinned by its terrific brand intangible assets. The company's ability to set premium pricing for what has historically been a commoditized product is a testament to the strength of its brand. This pricing power is evidenced by Starbucks' ability to raise prices and improve product mix by 8% annually in the US over the past five years, significantly outpacing category inflation.
📰 To Read: How Many Cups Of Coffee Do People Around The World Drink In A Lifetime
The company's brand strength is further demonstrated by its success in international markets, with operations in over 80 countries, and its strong performance in the retail channel. Starbucks' ability to generate excitement and traffic while spending less on marketing than category peers reinforces the importance and impact of its brand.
Additionally, the company benefits from a cost advantage derived from its global scale, allowing it to procure commoditized food and paper items at favorable prices and leverage technology investments across a larger store base.
🚀 Business Strategy
Starbucks' business strategy is centred around its "reinvention plan", which focuses on several key priorities. These include investing in the in-store partner experience, recalibrating stores to better meet the needs of an increasingly off-premises consumer, and emphasizing consistent guest experience across omnichannel touch points.
With over 70% of sales now coming through drive-thru, delivery, and mobile order and payment channels, the company is placing augmented attention on back-end systems and throughput capacity. Starbucks is also investing heavily in its loyalty program, which boasts approximately 33 million active users in the US, accounting for roughly 60% of US order volume.
The company's strategy also involves ongoing investments in new beverage platforms and menu architecture designed to target specific customer groups, leveraging its data-driven approach to gain a durable edge over smaller competitors.
💰 Profit Drivers
Starbucks' profitability is driven by several key factors. The company's premium positioning allows it to propose higher prices, with an average ticket of $8.99 in the US in 2023, comfortably outpacing peers like Dunkin' ($4.39) and Tim Hortons ($5.16).
The company's direct-to-consumer model, primarily selling through company-operated stores and e-commerce platforms, enables higher margins compared to competitors who rely more heavily on wholesale channels.
Starbucks' ongoing investments in its loyalty program have proven successful, with program participants spending two to three times more than non-members. The company's ability to leverage its scale for procurement advantages and technology investments also contributes to its profitability.
Additionally, Starbucks' international expansion, particularly in China, represents a significant growth opportunity, with the firm expecting to reach 9,000 stores in China by the end of fiscal 2025.
✅ Advantages
Starbucks enjoys several key advantages that contribute to its market-leading position. The company's strong brand recognition and loyal customer base provide a solid foundation for continued growth. Its ability to maintain premium pricing and high margins, even in the face of increasing competition, underscores the strength of its brand and the perceived value of its products.
Starbucks' innovative approach to product development, supported by ongoing investments in new beverage platforms and menu architecture, allows the company to stay ahead of trends and continuously introduce new offerings.
The company's multi-channel distribution strategy, combining company-operated stores, licensed locations, and e-commerce platforms, provides flexibility and resilience. Starbucks' strong digital presence, with its loyalty program driving a significant portion of sales, demonstrates its ability to adapt to changing consumer preferences and shopping behaviors.
📰 To Read: Starbucks Rewards
❌ Disadvantages
Despite its strong market position, Starbucks faces several challenges. The company operates in a highly competitive industry, with pressure from both quick-service peers and at-home consumption options. The ongoing shift towards off-premises consumption, accelerated by the COVID-19 pandemic, presents operational challenges as Starbucks works to recalibrate its stores and systems.
The company's reliance on discretionary consumer spending makes it vulnerable to economic downturns and shifts in consumer behavior. Starbucks' international expansion, while offering significant growth potential, also carries risks associated with operating in diverse markets with varying consumer preferences and regulatory environments.
The company's heavy reliance on its brand image also means that any negative publicity or quality issues could have a disproportionate impact on its business.
🏛️ Capital Allocation
Starbucks demonstrates an exemplary approach to capital allocation, balancing investments in growth with shareholder returns. The company's reinvention plan involves significant investments in store redesigns, technology, and employee wages to drive long-term growth and efficiency.
Starbucks maintains a strong balance sheet with a manageable debt load, targeting a long-term adjusted debt/EBITDAR below 3 times. The company's highly cash-generative model allows for substantial investment flexibility, with average annual free cash flow to the firm expected to average 9% of sales over the next five years.
Starbucks has a history of returning capital to shareholders through both dividends and share repurchases, with a projected dividend payout ratio of 50%-55% over time. The company anticipates shareholder returns of $17.2 billion between 2024 and 2026, demonstrating its commitment to balancing growth investments with shareholder returns.
💲Current Valuation
Starbucks' current valuation metrics show a general decrease compared to recent quarters. The current Market Cap of $85.53B is significantly lower than its value of $119.68B a year ago, indicating a substantial drop in the company's market value. The Trailing P/E ratio has decreased from 36.16 in March 2023 to 20.80 currently, suggesting the stock is less expensive relative to its past earnings. Similarly, the Forward P/E has declined from 30.86 to 18.90, implying improved future earnings expectations relative to the stock price. The PEG Ratio has slightly decreased from 1.75 to 1.30, indicating a potentially better value considering expected growth. The Price/Sales ratio has also fallen from 3.65 to 2.36, showing the stock is cheaper relative to its sales.
These metrics suggest Starbucks is currently valued more conservatively compared to its recent historical levels, potentially offering better value for investors.
📈 Past and Future
In the short to medium term, SBUX has significantly underperformed both its industry and the broader market index, with notable declines over the past year (-19.15%) and year-to-date (-17.73%). This contrasts sharply with the industry's milder losses and the market index's gains during the same periods.
However, SBUX's long-term performance presents a more positive picture. Over 10 and 15-year periods, SBUX has delivered solid returns (9.09% and 18.96% respectively), outperforming the restaurant industry in the 15-year timeframe and showing competitive results against the broader market index. SBUX has demonstrated the capacity to generate strong returns for investors who maintain long-term positions.
According to analyst estimates, Starbucks is projected to experience steady growth over the next three fiscal years. Sales are expected to increase from $36.76 billion in FY 2024 to $43.33 billion in FY 2026, representing a compound annual growth rate of about 8.6%. The year-over-year sales growth is forecasted to accelerate from 2.19% in FY 2024 to 8.58% in FY 2025, maintaining a similar pace of 8.56% in FY 2026.
Earnings per share (EPS) are also anticipated to rise, from $3.57 in FY 2024 to $4.63 in FY 2026. The EPS growth rate is expected to significantly improve, jumping from 0.87% in FY 2024 to 14.92% in FY 2025, followed by a slight moderation to 12.88% in FY 2026.
These estimates suggest analysts expect Starbucks to achieve consistent revenue growth and improve profitability over the next three years.
🥇 Competitors
Starbucks faces competition from a variety of players in the quick-service restaurant and coffee retail spaces. Major competitors include McDonald's, which has made significant inroads in the coffee market with its McCafé platform, and Dunkin', which competes directly in the specialty coffee segment. Yum Brands, with its global presence and multi-brand portfolio, also presents competition in various markets.
In the packaged coffee and ready-to-drink beverage segments, Starbucks competes with large consumer packaged goods companies like Nestlé, with whom it has also formed a global coffee alliance. The company also faces growing competition from local and regional specialty coffee chains, particularly in international markets like China, where local players have been gaining traction.
📰 To Read: Coffee Statistics, Consumer Trends, & Key Takeaways [2024]
🤔 Q2 FY24 and FY 24 Guidance
Starbucks faced challenges in the second quarter of fiscal year 2024, reporting a 1% year-over-year decline in global net revenue to $8.6 billion. Performance varied across regions, with North America, representing 74% of revenue, experiencing a 3% drop in comparable store sales. The international segment, particularly China, saw more significant declines with an 11% decrease in comparable sales.
Despite revenue challenges, Starbucks continued its expansion, growing its global store count by 6% year-over-year to 38,951 locations. However, profitability was under pressure, with non-GAAP global operating margin decreasing by 140 basis points to 12.8% and non-GAAP earnings per share falling 7% to $0.68.
On a positive note, digital engagement remained strong, with 32.8 million active Starbucks Rewards members in the U.S. and mobile order and pay accounting for 31% of transactions. The company also highlighted successful new product launches, such as the Lavender Platform, as a bright spot in its innovation efforts.
Starbucks' FY 2024 guidance indicates challenges ahead. Comparable store growth is expected to be flat to decline across global markets, with China facing a more significant decline. Despite this, the company plans continued expansion, projecting 6% global new store growth, with China leading at 12%. Global revenue is expected to grow in the low single digits, while the operating margin should remain flat.
Capital expenditures are set at about $3 billion. Both GAAP and Non-GAAP EPS are forecast to be flat to low single-digit growth. This outlook suggests Starbucks is navigating near-term pressures while maintaining its long-term growth strategy, especially in China.
📊 Market Trends
According to Grand View Research, the global coffee industry, valued at $461.25 billion in 2022, is forecast to grow at a 5.2% CAGR through 2030. This expansion is driven by increasing worldwide demand, particularly in emerging markets like Asia Pacific. Key factors fueling this growth include rising disposable incomes, evolving urban lifestyles, and a growing coffee culture. These trends are not only expanding the market but also driving innovation and diversification within the industry, as consumers seek more premium and varied coffee experiences. The U.S. coffee market is presented below.
The specialty coffee market, valued at $21.9 billion in 2022, is projected to grow at an impressive 11.3% CAGR through 2030. This rapid expansion is driven by evolving consumer tastes, increased focus on sustainability, and the significant influence of millennial coffee enthusiasts. Key trends shaping the market include the proliferation of coffee shops, the rise of Ready-To-Drink (RTD) specialty coffee, and the growing popularity of cold brew and nitro coffee. These shifts present lucrative opportunities for market vendors as demand for diverse specialty coffee varieties continues to surge. The U.S. specialty coffee market is presented below.
This is not a financial or investing recommendation. It is solely for educational purposes.