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Company Profile
Personally, I think Starbucks' stock is an excellent investment! I've owned it since 2010 and I bought more stock during the COVID dip of May 2020, and I've experienced an overall compound average growth rate (CAGR) of 68.7% with this stock!
Even folks who don't drink coffee are largely familiar with Starbucks, and some know a solid investment opportunity when they see one! Not everyone is necessarily a fan of Starbucks' coffee, but the company has diversified its offerings to include tea, breakfast sandwiches, unique sweets, etc. It also serves up a variety of types of coffee and coffee-based drinks, and the ambiance of each store is also a draw.
Together with its subsidiaries, Starbucks operates a roaster, marketer, and retailer of specialty coffee worldwide. The company also licenses its trademarks through licensed stores, and grocery and foodservice accounts. As of October 3, 2021, it operated 16,826 company-operated and licensed stores in North America; and 17,007 company-operated and licensed stores internationally. The company was founded in 1971 and is based in Seattle, Washington.
Personally, I am a fan of Starbucks coffee, and in the effort of full transparency, I want to reiterate that I am also a holder of the company's stock. I have a Starbucks location right across the street from me, and I think it's a good quick-stop spot to grab a quality cup of coffee and potentially pair it with a complementary snack. There are ebbs and flows in how often I visit a Starbucks, but I invariably keep going back.
Sometimes, I post up at a Starbucks location and get some work done on my laptop, while others essentially make a Starbucks location their office base. They are there for hours each day, several days a week! Regardless of the time of day, it seems that Starbucks locations remain busy with customers, and the staff remains busy churning out beverages and snacks.
Past Performance
Starbucks was first founded back in 1971, and it now has thousands of locations across the world. In the past 10 years, the stock has grown at a compound annual growth rate (CAGR) of a whopping 59.8%!
That rate is closer to 342% since 1992 when it first offered its stock to the public. You can't always get into such an opportunity that early, since it's oftentimes very difficult to identify such an outstanding investment opportunity early on. However, don't let opportunity pass you by! If a company is well-positioned in its industry and continues to churn out high-demand, quality products, the opportunity to make above-average returns on your investment (ROI) may still exist!
The company initiated a dividend in 2010 and has increased it each year since then, and with higher payout ratios. Previously the stock offered a pretty low yield, but in recent years it is reasonable, and higher than the S&P 500 average. That keeps me going back for more shares!
COVID-19 2020
Indeed, the onset of COVID-19 in March 2020 was full of uncertainty as far as health, business, and otherwise. It was a true disrupter to life as we know it. However, despite the dip in Starbucks' performance and stock price during that time (like a lot of companies during that period), the company showed resiliency in navigating the business landscape! It has effectively leveraged its brand name and other competitive advantages to resurface at the top within its business space.
Operating History
Furthering the extraordinary business practices of Starbucks as a company is its operating history. As I always say, past performance is certainly no predictor of the future, but it's a sure gauge of how future performance may play out! With particular attention being paid to key financial metrics, we can't help but to notice that, with the exception of Spring 2020 due to COVID, it's clear that Starbucks' operations have performed superbly.
Management has proven effective in driving superior returns to shareholders and debtholders, with outstanding ROE, ROTC, and ROA metrics, indicating strong leverage of its assets and resources.
Improving Margins
A close observation of the chart above shows that Starbucks is performing better than the sector median in all respects, with the exception of its gross profit margin, which is 25.96% versus the sector median of 35.97%. This would suggest an issue with its Cost of Goods Sold. Consistent with the trend of inflation and corporate supply-chain issues, much of Starbucks' recent profit margin issues are related to rising input costs. Wages and commodity prices have risen, including those for coffee beans, having an adverse impact on profit margins.
Recently, however, there appears to be a pivot with respect to the prices of key inputs. The cost of both Robusta and Arabica coffee beans has shifted lately amid supply/demand corrections. Data also suggests that the long-term growth rate of coffee bean prices could enter a downward trajectory, potentially benefitting Starbucks.
Customer Loyalty
Despite lower gross margins, net profit has outperformed competitors and has improved year-over-year, driven by a 9% increase in U.S.-based same store sales. This further solidifies Starbucks' command of customer loyalty as there are no clear signs of its consumer base opting for substitute products.
Furthermore, the firm's organic compound annual growth rates reveal Starbucks' market stronghold. Starbucks owns approximately 36% to 37% of the coffee shop market in the United States and possesses a global footprint, allowing it to exert pricing power.
Y/Y CAGR17.94%3-Y CAGR7.06%5-Y CAGR7.38%10-CAGR9.45%Source: TIKR.com
Starbucks is facing challenges in China, which has implemented new COVID-related lockdowns. Additionally, the immediate resignation of their CEO and Howard Schultz stepping back in as interim CEO have all put additional pressure on the company. This has been reflected in the stock's share price during the past year. The new CEO Laxman Narasimhan will step into the role in April, with Schultz setting the stage in the interim. This is a bit unusual, but I see it as an advantage, allowing Schultz time to effectively integrate the new CEO.
Reinvesting in Itself!
Starbucks is reinvesting in itself, taking the bulk of its earnings and spending on a new business plan. The company anticipates it will be able to target higher earnings per share (EPS) and revenue levels by putting more investments into the business with increased store openings, higher margins, and resuming share buybacks. Long-term debt has also increased in the form of corporate bonds that are also being reinvested into the company's operations. Store openings are expected to grow at 7% annually, up from 6%. This resonates very well with me, since Starbucks has the ability to deploy capital at high rates of return!
Comparable store sales are projected to grow 7% to 9% each year through 2025, up from 4% to 5%. This will be driven by increased store openings and share buybacks as well as easing restrictions in China in coming years. Cash Flow is also expected to grow 15% to 20% annually during the same period. The latest quarter showed just over $4 billion in shares being repurchased, and they spent around $1.7 billion on dividends. This demonstrates a clear commitment to shareholder interests, which I believe will ultimately be reflected in the value of the stock.
Competitive Advantage
The Starbucks brand alone has significant power. It has consistently provided a connected customer experience with long-term relationships. That's why folks keep going back to Starbucks locations, and many keep spending hours of their time per day there. The Starbucks experience makes customers feel at home, with great ambiance and accessibility. It also has a Starbucks Rewards card that provides a host of benefits to customers.
The company's competitive advantage is rooted in the quality of their coffee beans too though. They reportedly use the finest coffee beans, with company personnel often traveling in search of suppliers that meet its standards. Starbucks also purchased Certified Organic coffee and Fair Trade certified coffee. In 2009 alone, 14 million pounds of certified organic coffee was purchased by Starbucks Corp.
According to the renowned Harvard strategist Michael Porter, three general strategies can be used to achieve a sustained competitive advantage: cost leadership, differentiation, and focus. Starbucks dominates the market. Product differentiation, driven by an excellent customer experience and quality coffee, is at the core of Starbucks' strategy to gain a sustained competitive advantage. This is coupled with well-trained staff and great ambiance that consistently enhances the Starbucks experience and has customers coming back with high frequency. Going forward should reflect more of the same in that regard!
Conclusion
Starbucks stock is currently trading at about $97 per share. It's off of its 1-year high of $117 per share, but still reasonably above its 1-year low of $68 per share. At a P/E ratio of 28, it's also a bit expensive, but the long-term economics continue to indicate a great opportunity for investment. I think it's selling at a discount to its long-term value, but you have to decide for yourself if/when to invest.
I remain optimistic and continue to own and buy more of Starbucks stock. The company is going through a challenging time, but they have a number of factors working in their favor, including consumer loyalty, competitive advantage, and management's focus on shareholder interests. The brand is exceedingly strong! I think we see share prices rise gradually as results are achieved, seeing the share price and dividends rise over time to ultimately reflect the true value of the company. When a quality investment opportunity is beaten down and selling at a discount, the time to invest is NOW! Buy and hold. I believe you won't be sorry in the long-run for doing so...
Disclosure/Disclaimer
The information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions. I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.
