Coffee chain Starbucks (NASDAQ: SBUX) began in the 1970s but shot to international stardom in the 1990s after Howard Schultz took the helm. By the end of the nineties, it was the largest coffeehouse chain in the world, with over 2,500 locations in around a dozen countries.
Schultz stepped down as CEO in 2000 but returned in 2008 to help revive its flagging profits. He stepped down again in 2017 to be replaced by Kevin Johnson.
In 2022, Johnson unexpectedly resigned, as mounting headwinds, including union backlash, COVID-19, supply chain issues and trouble in China, took their toll. Schultz once again returned as interim CEO but is slated to be replaced by Laxman Narasimhan, the outgoing CEO of Reckitt Benckiser (LON: RKT), in April next year. Narasimhan plans to focus on unions, pay and benefits as part of Schultz's reinvention plan.
What Is Starbucks?
Starbucks Corporation is the premier roaster, marketer, and retailer of specialty coffee. The company offers packaged and single-serve coffees and teas, beverage-related ingredients, and ready-to-drink beverages, as well as produces and sells bottled coffee drinks and a line of ice creams. Starbucks serves customers worldwide.
The firm's brands include Seattle's Best Coffee, Evolution Fresh, Ethos, Starbucks Reserve and Princi.
The company is headquartered in Seattle, Washington State.
In Q3, Starbucks' stores in the US and China comprised 61% of the company's global portfolio, with 15,650 stores in the US and 5,761 stores in China. At the end of the quarter, Starbucks operated 34,948 stores globally. 51% of these are company-operated, and 49% are licensed.
How Does Starbucks Make Money?
Starbucks makes money selling hot and cold drinks to members of the public. It also generates revenues through royalty & licensing, selling beverage-related ingredients, serveware, and ready-to-drink beverages through its company-operated and licensed stores.
As Starbucks navigates a turbulent period, the company is focused on reinvention. This includes increasing efficiency to seamlessly handle the increasing demand in its US stores while improving its partner, customer, and in-store experiences.
SBUX Q3 Financial Results
Starbucks reported its latest quarterly results on August 31, for the period ending July 2022.
Earnings per share (EPS) beat FactSet analyst consensus estimates by 9.5% coming in at $0.84 instead of the projected $0.77. Meanwhile, sales of $8.15bn beat consensus estimates of $8.14bn.
Net Sales: $8.15bn (up 8.7% Y/Y)
Q3 Comparable Store Sales Up 3% Globally; Up 9% in the US and Up Double Digits Internationally, excluding-China
Q3 GAAP EPS: $0.79 (down from $0.97 Y/Y)
Non-GAAP EPS: $0.84 (down from $0.99 Y/Y)
Starbucks opened 318 net new stores in Q3.
GAAP Operating Margin: 15.9% (decreased 400 basis points from 19.9% Y/Y)
Non-GAAP Operating Margin: 16.9% (decreased from 20.4% Y/Y)
Starbucks® Rewards loyalty program 90-day active members in the US increased to 27.4 million, up 13% Y/Y
The company's operating margin drop appears to be mainly caused by inflationary pressures, including wages. Additionally, a drop in sales in China due to COVID-19 restrictions. These costs were partially offset by raising prices in North America.
Howard Schultz, the interim CEO, said:
We have clear line-of-sight on what we need to do to reinvent the company, elevate our partner and customer experiences and drive accelerated, profitable growth all around the world,
The Q3 results we announced today demonstrate the early progress we have made in just four short months,
We delivered record-breaking revenue performance during the quarter from continued strength in customer demand globally, balanced with our ability to execute investments despite macroeconomic and operational headwinds.
Starbucks (SBUX) next reports its quarterly earnings for the quarter ending September 2022 on November 3. FactSet estimates have a full-year consensus EPS of $2.88 and a sales consensus of $32.17bn.
SBUX Stock Financials
SBUX stock has a price-to-earnings ratio (P/E) of 23.3 and comes with a dividend yield of 2.4%.
Over the past year, SBUX stock has traded between $68.39 and $120.76. Today it trades at around $82.94. Year-to-date, the Starbucks stock price is down by -28.92%, while the S&P 500 is down by -18.19% over the same period.
FactSet analysts have an Overweight rating on SBUX stock with a target share price of $93.37.
A stock with a beta higher than 1.0 is expected to be more volatile than the S&P 500. SBUX stock has a beta of 0.98.
Starbucks Growth Potential
According to the National Coffee Association (NCA), coffee consumption soared to a two-decade high in March this year. 66% of Americans now drink coffee daily, more than any other beverage, including tap water and up by nearly 14% since January 2021.
The coffee industry regularly innovates new methods for brewing and serving coffee to meet consumers' fast-changing tastes. This is a highly competitive industry, and Starbucks must remain ahead of the game to retain its top spot.
Part of Starbucks' strategy is to grow its store footprint. The company aims to achieve 55,000 Starbucks locations across 100 different markets by 2030. This includes 75% of its expansion out with the US market.
We believe our financial results and long-term growth model will continue to be driven by new store openings, comparable store sales growth and operating margin management, underpinned by disciplined capital allocation.
SBUX Stock Risks
Inflation and rising interest rates are reducing consumer disposable income.
COVID-19 pandemic-related disruptions in Starbucks' China market continue to weigh on sales in the region.
Starbucks operates in a highly competitive environment subject to fast-changing trends and tastes.
Forex transaction costs can also mount up, particularly with a strong dollar. SBUX operates in multiple regions.
Like many of its peers, Starbucks uses non-GAAP reporting to showcase its financial results. Many traditional investors do not like this reporting style as it omits charges and costs that could paint a clearer picture of the company's growth prospects. For instance, Starbucks' non-GAAP results do not include several items related to strategic actions, including restructuring and impairment charges, transaction, and integration costs.
Nevertheless, more than 90% of S&P 500 companies choose to include non-GAAP metrics in their financial reporting and defend this with the argument that GAAP standards are also flawed.
Should You Invest in SBUX?
The desire for coffee does not appear to be dissipating, and Starbucks' recent results show consumers are still spending, despite price hikes. Nevertheless, rising inflation and interest rates hint at the prospect of a recession during which SBUX may face lower footfall.
When discussing the headwinds the company faces, Schultz also commented:
Some are definitely COVID-related. Some were a function of not focusing on the long-term, and unfortunately, many were self-induced. More important, we now have clear line of sight on what we need to do to totally reinvent the company and drive accelerated profitable growth around the world.
Starbucks has stood the test of time and remains a popular coffee chain. As an investment, it proved highly profitable from 2008 to 2021. Today, the SBUX share price is 31% below its 2021 high, but its financial metrics don't suggest a cheap stock.
The 2.4% dividend yield adds investor appeal, and the arrival of Laxman Narasimhan as the new CEO reassures investors of the company's desire to succeed.
Whether you invest in SBUX stock, today depends on your belief in its ability to withstand an economic downturn and your investing time horizon.