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Starbucks (SBUX) Up 20% YTD: Can the Rally Continue in 2021?
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The year 2020 has been a nightmarish one for most of the industries. and restaurant industry has been no exception to the trend. However, despite the coronavirus crisis, shares of Starbucks Corporation (SBUX - Free Report) have rallied 20.1% year to date compared with the industry’s growth of 13.6%. Faster-than-anticipated sales recovery in the United States, robust digitalization and sales building efforts acted as a catalysts amid the crisis. Nevertheless, decline in margin and high debt remain concerns. Let’s delve deeper.
Growth Drivers
Although the company’s sales have been impacted by the coronavirus pandemic, it is witnessing faster-than-anticipated sales recovery in the United States. In fourth-quarter fiscal 2020, comps fell 4% for the month of September, compared with a decline of 65% recorded five months ago. In the United States, comps slumped 9% in the fourth quarter, compared with a decline of 41% in the third quarter. Transactions volumes in the United States continue to witness sharp improvement. The company anticipates global comparable sales to increase between 18% and 23% in fiscal 2021. Moreover, it anticipates Americas and U.S. comparable store sales to increase in the range of 17% to 22% in fiscal 2021. International comps for the fiscal 2021 are expected to be 25-30%.
The company is also benefiting from robust digitalization. Starbucks has introduced its mobile order and pay feature — Starbucks Now — to multiple platforms in the Alibaba Digital Economy, which includes Taobao, Amap, Koubei and Alipay. Starbucks customers can also use Starbucks Now feature to pre-order and pay for their favorite Starbucks beverage and food online before in-person pick-up at local stores. This will help Starbucks in expanding presence in China as Alibaba Digital Economy has user base of nearly 1 billion. In China, the company’s delivery program is available in 84% of its stores.
Moreover, the company is focusing on expanding its footprint. In fiscal 2019, Starbucks added 1,900 net new stores. In 2018 and 2017, the company had added 2,300 and 2,250 net new locations. Despite the pandemic, the company opened 130 and 260 net new stores in third and fourth-quarter fiscal 2020, respectively. Moreover, the company opened 1,400 new stores in fiscal 2020. The company anticipates inaugurating nearly 2,150 (850 stores in Americas and 1,300 internationally) news stores and 1,100 (50 stores in Americas and 1,050 in internationally) net new stores worldwide in fiscal 2021.
Starbucks is rapidly expanding food offerings in the United States to complement its drinks. The company re-launched Pumpkin Spice platform in late August, which drove fourth-quarter fiscal 2020 results.
Starbucks’ recent collaboration with Beyond Meat to roll out a plant-based lunch menu in the China is a testament to the same. Now Starbucks customers can enjoy pastas and lasagna made utilizing Beyond Meat's plant-based beef products. It will also include meatless pork alternative known as Omnipork and popular non-dairy milk called Oatley. The new menu is available at more than 3,300 Starbucks locations in China. Both the companies have already partnered to roll out a plant-based sandwich to Canadian locations.
Concerns
Decline in top and bottom lines has been a major concern. The company noted that due to the coronavirus pandemic, it had lost nearly $3.1 billion in consolidated revenues. The downside was primarily a result of store closures, limited sales channels, reduced operating hours and dismal customer traffic.
Margin contraction remains a major woe. Although margin expanded improved in first-quarter fiscal 2020, it declined in second, third and fourth-quarter 2020. On a non-GAAP basis, operating margin contracted 660, 570 and 400 basis points in second, third and fourth-quarter 2020, respectively. The downtrend can primarily be attributed to sales deleverage and rise in costs due to the coronavirus pandemic, mostly catastrophe wages, and heightened pay programs and additional benefits in support of retail store partners, inventory write-offs and store safety items.
The company’s long-term debt increased to $14,659.6 million (as of Sep 27, 2020) from $14,645.6 million at Jun 28, 2020. Notably, its times-interest-earned ratio of 3.7 reflects decline from 5.2 in the third quarter. This indicates reduced relative freedom of the company from the constraints of debt. Moreover, the company ended third-quarter fiscal 2020 with cash and cash equivalent of $4.4 billion, which is not be enough to manage the high-debt level.
Some better-ranked stocks in the same space include Jack in the Box Inc. (JACK - Free Report) , Ruth's Hospitality Group, Inc. and FAT Brands Inc. (FAT - Free Report) , each carrying a Zacks Rank #2 (Buy).
Jack in the Box has a three-five year earnings per share growth rate of 10.6%.
Ruth's Hospitality and FAT Brands’ earnings for 2021 are expected to soar 264.6% and 127%, respectively.
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
Image: Bigstock
Starbucks (SBUX) Up 20% YTD: Can the Rally Continue in 2021?
The year 2020 has been a nightmarish one for most of the industries. and restaurant industry has been no exception to the trend. However, despite the coronavirus crisis, shares of Starbucks Corporation (SBUX - Free Report) have rallied 20.1% year to date compared with the industry’s growth of 13.6%. Faster-than-anticipated sales recovery in the United States, robust digitalization and sales building efforts acted as a catalysts amid the crisis. Nevertheless, decline in margin and high debt remain concerns. Let’s delve deeper.
Growth Drivers
Although the company’s sales have been impacted by the coronavirus pandemic, it is witnessing faster-than-anticipated sales recovery in the United States. In fourth-quarter fiscal 2020, comps fell 4% for the month of September, compared with a decline of 65% recorded five months ago. In the United States, comps slumped 9% in the fourth quarter, compared with a decline of 41% in the third quarter. Transactions volumes in the United States continue to witness sharp improvement. The company anticipates global comparable sales to increase between 18% and 23% in fiscal 2021. Moreover, it anticipates Americas and U.S. comparable store sales to increase in the range of 17% to 22% in fiscal 2021. International comps for the fiscal 2021 are expected to be 25-30%.
The company is also benefiting from robust digitalization. Starbucks has introduced its mobile order and pay feature — Starbucks Now — to multiple platforms in the Alibaba Digital Economy, which includes Taobao, Amap, Koubei and Alipay. Starbucks customers can also use Starbucks Now feature to pre-order and pay for their favorite Starbucks beverage and food online before in-person pick-up at local stores. This will help Starbucks in expanding presence in China as Alibaba Digital Economy has user base of nearly 1 billion. In China, the company’s delivery program is available in 84% of its stores.
Moreover, the company is focusing on expanding its footprint. In fiscal 2019, Starbucks added 1,900 net new stores. In 2018 and 2017, the company had added 2,300 and 2,250 net new locations. Despite the pandemic, the company opened 130 and 260 net new stores in third and fourth-quarter fiscal 2020, respectively. Moreover, the company opened 1,400 new stores in fiscal 2020. The company anticipates inaugurating nearly 2,150 (850 stores in Americas and 1,300 internationally) news stores and 1,100 (50 stores in Americas and 1,050 in internationally) net new stores worldwide in fiscal 2021.
Starbucks is rapidly expanding food offerings in the United States to complement its drinks. The company re-launched Pumpkin Spice platform in late August, which drove fourth-quarter fiscal 2020 results.
Starbucks’ recent collaboration with Beyond Meat to roll out a plant-based lunch menu in the China is a testament to the same. Now Starbucks customers can enjoy pastas and lasagna made utilizing Beyond Meat's plant-based beef products. It will also include meatless pork alternative known as Omnipork and popular non-dairy milk called Oatley. The new menu is available at more than 3,300 Starbucks locations in China. Both the companies have already partnered to roll out a plant-based sandwich to Canadian locations.
Concerns
Decline in top and bottom lines has been a major concern. The company noted that due to the coronavirus pandemic, it had lost nearly $3.1 billion in consolidated revenues. The downside was primarily a result of store closures, limited sales channels, reduced operating hours and dismal customer traffic.
Margin contraction remains a major woe. Although margin expanded improved in first-quarter fiscal 2020, it declined in second, third and fourth-quarter 2020. On a non-GAAP basis, operating margin contracted 660, 570 and 400 basis points in second, third and fourth-quarter 2020, respectively. The downtrend can primarily be attributed to sales deleverage and rise in costs due to the coronavirus pandemic, mostly catastrophe wages, and heightened pay programs and additional benefits in support of retail store partners, inventory write-offs and store safety items.
The company’s long-term debt increased to $14,659.6 million (as of Sep 27, 2020) from $14,645.6 million at Jun 28, 2020. Notably, its times-interest-earned ratio of 3.7 reflects decline from 5.2 in the third quarter. This indicates reduced relative freedom of the company from the constraints of debt. Moreover, the company ended third-quarter fiscal 2020 with cash and cash equivalent of $4.4 billion, which is not be enough to manage the high-debt level.
Zacks Rank & Key Picks
Starbucks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the same space include Jack in the Box Inc. (JACK - Free Report) , Ruth's Hospitality Group, Inc. and FAT Brands Inc. (FAT - Free Report) , each carrying a Zacks Rank #2 (Buy).
Jack in the Box has a three-five year earnings per share growth rate of 10.6%.
Ruth's Hospitality and FAT Brands’ earnings for 2021 are expected to soar 264.6% and 127%, respectively.
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>