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Starbucks Provides Long-Term Growth Plan: What to Expect?

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At the biennial Investor Conference in New York City on Dec 7, coffee chain giant Starbucks Corporation (SBUX - Free Report) outlined its five-year growth plan. Consequently, shares gained over 2% in yesterday’s trading session.

Per the plan, the company is targeting annual revenue growth of 10% over the next five years. Additionally, the company revealed its intention to drive earnings by 15–20% as well as mid-single digit comps growth each year. To achieve this, Starbucks plans to open roughly 12,000 new stores around the world by 2021, taking the total tally to nearly 37,000 stores. This apart, the company will continue to boost the Starbucks Experience globally.

We note that only last week, the company announced that Chief Executive Officer (CEO), Howard Schultz, will step down from his post – effective Apr 3, 2017 – and assume the role of executive chairman. Thereafter, Schultz will shift his focus to innovation, design and expansion of the high-end Starbucks Reserve Roastery concept globally. Kevin Johnson – the current President and Chief Operating Officer – will then take over as CEO.

Inside the Headlines

Changing the Premium Coffee Experience: The company will be focusing on its high-end coffee stores, such as the Starbucks Reserve Roastery, which offers premium coffee roasted in-store. Starbucks opened the first such shop in Seattle in Dec 14, and the massive sales performance of the store has encouraged it in believing that the new concept can fuel the next wave of revolution and accelerate growth.

Starbucks now plans to open 20 to 30 more of the high-end stores in prominent cities around the world. In fact, the company intends to open the next Roastery in Shanghai in 2017, one each in Tokyo and New York City in 2018. The company is also looking to open a fifth store in Europe, which will be announced early next year.

Furthermore, the company plans to build up to 1,000 smaller stores reminiscent of the Roastery, under the "Starbucks Reserve" brand, barring the on-site roasting, which will include items from Starbucks’ new Italian food partner, Princi. The first of these new Reserve stores will open in Seattle and Chicago during the second-half of fiscal 2017. Additionally, the company expects to open separate Princi stores in Seattle, New York and Chicago in late 2017 and in early on 2018.

Starbucks is also remodeling several of its over 24,000 stores with Reserve-branded coffee bars, where customers can get the same kind of coffee education and range of brewing methods as at the Reserve stores.

Premiumization of Offerings: The company is focusing on premiumization strategy via new product breakthroughs to drive pioneering customer experiences. Per Starbucks, the “premiumization” of its offerings has already begun with beverages like the Nitro Cold Brew, Flat White, and the limited-time Smoked Butterscotch Latte. The Cascara Latte, made with the fruit of the coffee cherry, is impending in Jan 2017.

Starbucks is concurrently innovating and expanding its food menu to latch onto the lunch daypart sales and build on existing breakfast daypart momentum. In fact, Starbucks intends to double food growth over the next five years.

China: Starbucks is particularly banking on sales in China, where it plans to open 5,000 of the 12,000 new stores by 2021, adding to the 2,500 stores it already operates in the nation. In fact, the company also expects its fast-growing China business to eventually outpace its U.S. market.

In order to further extend customer involvement and loyalty in China, the company entered into a partnership with Tencent Holdings Limited to bring social gifting and digital payment experience on WeChat, China’s leading mobile social communications service, in early 2017.

Technological Innovation: Starbucks holds a leading position in digital, card, loyalty and mobile capabilities. The company boasts 12 million Starbucks Rewards members and 8 million customers who use mobile pay, with one out of three using Mobile Order & Pay. Moreover, in the last year, over $6 billion loaded onto prepaid Starbucks Cards in North America,

We note that a new ordering system, My Starbucks Barista, which makes use of artificial intelligence and lets customers place orders via voice command or messaging, is set to be another growth driver for the company. The new feature, available on the Starbucks app, will be beta-launched on iOS in early 2017.

Expansion of Leadership: Starbucks is the industry leader in premium single serve, premium packaged roast and ground coffee, and Ready-to-Drink products. The company is well placed to grow its share of these markets, both in the U.S. and globally.

The company expects its channel development segment to bring in an incremental $1 billion in revenues, boost operating income by 75% and double its ready-to-drink business outside the U.S., over the next five years. Starbucks is in fact expanding its ready-to-drink options. The company plans to launch bottled Starbucks Cold Brew Cocoa and Honey with Cream in select markets across U.S. in spring 2017.

What’s Up at Starbucks?

Starbucks concluded fiscal 2016 on a solid note. Last month, the company reported better-than-expected results in the fiscal fourth quarter with earnings and revenues increasing 30.2% and 16%, respectively on a year-over-year basis. The improvement was buoyed by strong sales and margin expansion (up 180 bps), partially offset by increased partner investments.

Industry-leading innovation is driving the company’s core business and providing an edge over competitors. Meanwhile, higher sales in the U.S. and China/Asia Pacific division have counterbalanced a slowdown in the Europe, Middle East, and Africa (“EMEA”) segment.

We note that Starbuck’s shares have been outperforming the broader Zacks categorized Retail-Food & Restaurant industry over the past six months. While the stock has gained nearly 6%, the broader market had witnessed a dip of around 1% in the same time period.



Our Take

Though Starbucks continues to outperform the broader market, its growth has slowed down recently and traffic trends have remained soft of late.

Thus, a challenging environment in the U.S. restaurant space, along with Starbucks’ recent sales performance, might be a cause of worry for investors in the near term. However, the company’s five-year growth plan could be helpful in the long-run and aid in stimulating the brand.

Zacks Rank & Stocks to Consider

Starbucks currently has a Zacks Rank #3 ((Hold). Some better-ranked stocks in this sector include Papa John's International Inc. (PZZA - Free Report) , McDonald's Corp. (MCD - Free Report) and The Wendy's Company (WEN - Free Report) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Papa John’s 2016 earnings moved up 2.4% over the last 60 days. For the full year, earnings are expected to improve 19.9%.

The Zacks Consensus Estimate for McDonald's 2016 earnings climbed 2.3% over the last 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 6.16%.

Wendy’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 28.38%. Further, for 2016, EPS is expected to grow 23.6%.

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