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Starbucks (SBUX) Up 20% in 3 Months: Can the Bull Run Continue?

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Shares of Starbucks Corporation (SBUX - Free Report) have gained 20.2% in the past three months, compared with the industry’s rally of 10.5%. The company is benefiting from robust digitalization, solid global footprint and innovation. The company is witnessing faster-than-anticipated sales recovery in the United States. However, dismal margin remains a concern. Let’s delve deeper.

Factors Driving Growth

Starbucks’ solid execution of several initiatives in the United States and China, and best-in-class loyalty programs and digital offerings are expected to have driven profits. 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 expects to inaugurate 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. In China, the company anticipates opening 600 net new stores. New store productivity and Return on Investment (ROI) in the United States and China are high.

Starbucks sales have been impacted by the coronavirus pandemic. However, the company is witnessing faster than anticipated sales recovery in the United States. In the 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 decreased 9% in the fourth quarter, compared with a slump 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 expects 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%.

Starbucks' business in China is rapidly growing due to innovative store designs, local product innovations and the success of MSR program. It has plans to launch certain features in China loyalty program this year and full digital capabilities over time. In fourth-quarter fiscal 2020, the company’s reward members in China increased to $7.2 million. In the same quarter, China’s 90-day active members rose 36% over the fiscal third quarter to 13.5 million, reflecting growth of 34% year over year.

Concerns

Starbucks reported fourth-quarter fiscal 2020 results, wherein both earnings and revenues declined sharply year over year. The downside can primarily be attributed to dismal global retail and comparable sales, and decline in store traffic. Global comparable store sales fell 9% compared with a decline of 40% in third-quarter fiscal 2020. Global comps declined due to 23% fall in comparable transactions, partially mitigated by 17% increase in average ticket. The company noted that due to the coronavirus pandemic, it had lost nearly $3.1 billion in consolidated revenues.

Margin contraction remains a major concern. 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.

Zacks Rank & Key Picks

Starbucks currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the same space include Brinker International, Inc. (EAT - Free Report) , Del Taco Restaurants, Inc. (TACO - Free Report) and Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) . While Brinker sports a Zacks Rank #1 (Strong Buy), Del Taco and Red Robin Gourmet carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Brinker has a trailing four-quarter earnings surprise of 116.6%, on average.

Del Taco’s 2021 earnings are expected to increase 41.4%.

Red Robin Gourmet has an impressive long-term earnings growth rate of 10%.

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