It has been a remarkable journey for Starbucks (NASDAQ 🙂 since the summer of last year.
The shares of the coffee chain that sells popular Frappuccinos and pumpkin-spiced lattes rose to a record intraday high of $ 99.76 on July 26 after an increase of more than 100% since late June 2018 – rewarding investors who have not lost their patience during a long bearish spell that preceded this upward movement. The shares have since fallen slightly and are closing at $ 95.74 on Friday.
But now confidence in this coffee chain is being re-tested after the company had warned last week that the rate of profit growth that fueled this rally will slow in the next fiscal year and the company will not be as aggressive in its stock buy-back plan as it used to be.
Starbucks CFO Pat Grismer said at the Goldman Sachs Global Retailing Conference that the company expects taxable earnings per share to be lower in 2020 than its "continuous growth model of 10%". Grismer said that one-off tax benefits realized in fiscal 2019 will be a significant headwind for earnings growth next year. He also said that the share buyback of around $ 2 billion that the company made in fiscal 2019 will not be there in 2020 to support its shares.
In recent quarters, Starbucks has produced earnings growth that has exceeded expectations, making investors quite optimistic about this stock and creating the hope that the company's turnaround will support its growth momentum.
Firing on all cylinders
Before that ended in June, Starbucks recorded the fastest worldwide revenue growth in three years, helped by strong profits in China and the US. The Seattle-based chain reported a robust 6% profit in the same store worldwide – the most since 2016 and well above the projection of 4.2% compiled by Consensus Metrix
For 2019, Starbucks expects adjusted earnings from $ 2.80 to $ 2.82 per share this year, from $ 2.75 to $ 2.79 per share previously.
"I would say we are firing at all cylinders from an operational performance perspective, with the focus and discipline needed to drive scale growth for a company like Starbucks," Grismer said at the conference.
The latest conservative comments from Starbucks reflect a smart approach from the company, which attempts to set pretty optimistic market expectations. And this approach is in line with our earlier view on this stock, which seems a bit too expensive after a very successful run in the past year.
With a market capitalization of $ 114.6 billion, Starbucks is trading at a price-earnings multiple of 33.87, which is higher than Microsoft & # 39; s (NASDAQ 🙂 P / E of 29.31, Alphabet & # 39 ; s (NASDAQ 🙂 from 24.79 or Facebook & # 39; s (NASDAQ 🙂 from 31.78.
In our opinion, Starbucks' share currently reflects the turnaround in its largest markets – America and China – and it would be risky for investors to step into this trade now when these expectations have been fully priced in.
But when the next withdrawal comes, this share is an attractive buy-and-hold candidate for long-term investors, especially with its strong dividend growth, currently yielding around 1.5%.
On the strategy side, Starbucks remains well on track as the chain of coffee drinkers recovers not only in its home markets, but also in China – a country that has played a central role in its growth strategy. The future growth of the company is highly dependent on international success and home restructuring, which is crucial to meet the changing needs of customers.
The data-driven new CEO Kevin Johnson, who reported strong growth in the last four consecutive quarters, clearly knows what he is doing. The tactics he uses certainly seem to help to attract customers and increase their spending in the stores.
In the past year, the number of guests in the loyalty program has grown considerably and reached 17.2 million active members in the US, an increase of 14% on an annual basis. The result of these initiatives, combined with cost-saving measures in the supply chain, is that Starbucks continues to grow.
We see no major downturn in Starbucks shares in the remainder of this year with the company's core goals well on track. At the same time, we see no repeat of 2019 performance next year, especially if the US economy is in recession and its growth plans in China see some uncertainty due to geopolitical tension and increasing local competition.