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Starbucks Rides on Digital Innovation, Weak Margin a Woe
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Starbucks Corporation (SBUX - Free Report) is known for its brand building strategies and technological innovations through which the coffee giant is continuously driving its top-line growth. However, rising costs from extensive digitization have been a potential threat to the company’s margins of late.
In the third quarter of fiscal 2018, both earnings and revenues surpassed analysts’ expectations and recorded year-over-year growth. In fact, both the top and bottom lines surpassed the Zacks Consensus Estimate in each of the trailing four quarters.
Let us lay out the factors that suggest why investors are recommended to hold the stock.
Continual Effort in Solidifying Brand Presence
Despite being one of the most recognized coffee sellers in the world and the top-most premium packaged coffee brand in America, Starbucks is far from slowing down, when it comes to expansion and innovation. Management focuses on increasing its global market share by cautiously opening stores in new and existing markets, remodeling existing stores, deploying technology, controlling costs, and aggressive product innovation and brand building. In fiscal 2018, Starbucks expects to expand globally by adding 2,300 net new locations (excluding Teavana closures), marking an increase from roughly 2,250 net new locations last year. Growth is anticipated in the United States and China with new store productivity and Return on Investment (ROI) at all-time highs in these countries.
In fact, roughly two-thirds of new units are expected to be inaugurated in these markets — 900 in the Americas (half licensed) and 600 in China (out of 1,100 total new locations in China/Asia-Pacific). Moreover, the company will add 300 net new stores in EMEA (primarily licensed). It aims to open approximately 12,000 stores globally by fiscal 2021, reaching the total store count to an estimated 37,000.
In order to retain its leading position, Starbucks is also strengthening its product portfolio, with significant innovation around beverages, refreshment, health and wellness, tea, and core food offerings. The innovative menu has become a key growth driver and contributes more than 21% to the company’s U.S. revenues.
Loyalty Program and Digital Offerings
Starbucks holds a leading position in digital, card, loyalty and mobile capabilities. The company’s loyalty cards are gaining popularity. In the United States, membership increased 11% year over year under the My Starbucks Rewards (MSR) program in fiscal 2017.
The positive trend continued in the fiscal third quarter as well, with the membership growing 14% year over year to 15.1 million active members. Customers in the United States are using the chain’s mobile app to order and pay for drinks. They are also joining the company’s rewards program. Currently, MSR is one of the most important business drivers of Starbucks.
Starbucks’ mobile app is undoubtedly one of the widely-used mobile payment apps in the United States. Mobile payments represented 13% of U.S. transactions in the fiscal third quarter. This initiative allows customers to order before arriving at a Starbucks café and pick up the items at their selected Starbucks store, thus, saving time.
The service is witnessing increased usage and could prove to be key growth driver as adoption increases. Starbucks has also deployed the facility in many of its stores in the U.K. and Canada, with plans to continue rolling out the platform in key international markets. The company is witnessing an increased usage of MSR in countries outside the United States like China, Japan Korea and Canada.
The decline in margins has been a major concern for the company. In first, second and third-quarter fiscal 2018, Starbucks’ non-GAAP operating margin shriveled 170, 80 and 230 bps, respectively. The decline in the recently reported quarter can be primarily attributed to a 130-basis point impact from investments associated with the U.S. tax law change, product mix shift largely toward food and planned partner.
Rise in costs due to investment in digitalization also dented the company’s operating margin. Increased spending in its store partners (employees), along with the impact of the company’s ownership change in the East China business, added to the woes. For fiscal 2018, management expects a moderate decline in operating margin, reflecting additional partner and digital investments.
Meanwhile, in the fiscal third quarter, the company’s China-Asia-Pacific (CAP) comps declined 1%. Weakness in its China business has led the company to believe that global comps growth would be marginally below its earlier guidance of 3-5%.
Pressurized margins and dented comps might not have gone down well with investors as the company’s shares have lost 3.9% over the past six months against the industry’s collective growth of 3.7%.
Zacks Rank & Stocks to Consider
Starbucks currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the industry include BJ’s Restaurants (BJRI - Free Report) , Carrols Restaurant Group (TAST - Free Report) and Good Times Restaurants (GTIM - Free Report) . While BJ’s Restaurants sports a Zacks Rank #1 (Strong Buy), Good Times and Carrol carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
BJ’s Restaurants, Carrol and Good Times’ earnings for the current fiscal is expected to increase 50.4%, 80% and 33.3%, respectively.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 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.
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Starbucks Rides on Digital Innovation, Weak Margin a Woe
Starbucks Corporation (SBUX - Free Report) is known for its brand building strategies and technological innovations through which the coffee giant is continuously driving its top-line growth. However, rising costs from extensive digitization have been a potential threat to the company’s margins of late.
In the third quarter of fiscal 2018, both earnings and revenues surpassed analysts’ expectations and recorded year-over-year growth. In fact, both the top and bottom lines surpassed the Zacks Consensus Estimate in each of the trailing four quarters.
Let us lay out the factors that suggest why investors are recommended to hold the stock.
Continual Effort in Solidifying Brand Presence
Despite being one of the most recognized coffee sellers in the world and the top-most premium packaged coffee brand in America, Starbucks is far from slowing down, when it comes to expansion and innovation. Management focuses on increasing its global market share by cautiously opening stores in new and existing markets, remodeling existing stores, deploying technology, controlling costs, and aggressive product innovation and brand building. In fiscal 2018, Starbucks expects to expand globally by adding 2,300 net new locations (excluding Teavana closures), marking an increase from roughly 2,250 net new locations last year. Growth is anticipated in the United States and China with new store productivity and Return on Investment (ROI) at all-time highs in these countries.
In fact, roughly two-thirds of new units are expected to be inaugurated in these markets — 900 in the Americas (half licensed) and 600 in China (out of 1,100 total new locations in China/Asia-Pacific). Moreover, the company will add 300 net new stores in EMEA (primarily licensed). It aims to open approximately 12,000 stores globally by fiscal 2021, reaching the total store count to an estimated 37,000.
In order to retain its leading position, Starbucks is also strengthening its product portfolio, with significant innovation around beverages, refreshment, health and wellness, tea, and core food offerings. The innovative menu has become a key growth driver and contributes more than 21% to the company’s U.S. revenues.
Loyalty Program and Digital Offerings
Starbucks holds a leading position in digital, card, loyalty and mobile capabilities. The company’s loyalty cards are gaining popularity. In the United States, membership increased 11% year over year under the My Starbucks Rewards (MSR) program in fiscal 2017.
The positive trend continued in the fiscal third quarter as well, with the membership growing 14% year over year to 15.1 million active members. Customers in the United States are using the chain’s mobile app to order and pay for drinks. They are also joining the company’s rewards program. Currently, MSR is one of the most important business drivers of Starbucks.
Starbucks’ mobile app is undoubtedly one of the widely-used mobile payment apps in the United States. Mobile payments represented 13% of U.S. transactions in the fiscal third quarter. This initiative allows customers to order before arriving at a Starbucks café and pick up the items at their selected Starbucks store, thus, saving time.
The service is witnessing increased usage and could prove to be key growth driver as adoption increases. Starbucks has also deployed the facility in many of its stores in the U.K. and Canada, with plans to continue rolling out the platform in key international markets. The company is witnessing an increased usage of MSR in countries outside the United States like China, Japan Korea and Canada.
China-Asia-Pacific Comps & Shrinking Margins Disappoint
The decline in margins has been a major concern for the company. In first, second and third-quarter fiscal 2018, Starbucks’ non-GAAP operating margin shriveled 170, 80 and 230 bps, respectively. The decline in the recently reported quarter can be primarily attributed to a 130-basis point impact from investments associated with the U.S. tax law change, product mix shift largely toward food and planned partner.
Rise in costs due to investment in digitalization also dented the company’s operating margin. Increased spending in its store partners (employees), along with the impact of the company’s ownership change in the East China business, added to the woes. For fiscal 2018, management expects a moderate decline in operating margin, reflecting additional partner and digital investments.
Meanwhile, in the fiscal third quarter, the company’s China-Asia-Pacific (CAP) comps declined 1%. Weakness in its China business has led the company to believe that global comps growth would be marginally below its earlier guidance of 3-5%.
Pressurized margins and dented comps might not have gone down well with investors as the company’s shares have lost 3.9% over the past six months against the industry’s collective growth of 3.7%.
Zacks Rank & Stocks to Consider
Starbucks currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the industry include BJ’s Restaurants (BJRI - Free Report) , Carrols Restaurant Group (TAST - Free Report) and Good Times Restaurants (GTIM - Free Report) . While BJ’s Restaurants sports a Zacks Rank #1 (Strong Buy), Good Times and Carrol carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
BJ’s Restaurants, Carrol and Good Times’ earnings for the current fiscal is expected to increase 50.4%, 80% and 33.3%, respectively.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 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 >>