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Starbucks Crafts Strategies, Announces Store Closure & More

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Starbucks Corporation (SBUX - Free Report) announced three strategic initiatives in order to accelerate growth and drive its shareholders’ value in the long run, which are also expected to favor both the top and bottom lines of the company.

However, shares declined 1.3% in after-hours trading as the company revealed plans of shutting down a few stores in the United States. The company’s U.S. market is currently over-penetrated and stores are cannibalizing each other. Hence, Starbucks is trying to optimize its store in the United States.

Let’s take a detailed look at the company’s announced streamline strategies.

Strengthening Brand Footprint

Under these initiatives, the company is primarily focusing on increasing its growth rate in the United States and China. Additionally, through Global Coffee Alliance with Nestle, Starbucks plans to expand its footprint in Consumer-Packaged Goods (“CPG”) and Foodservice, adding opportunity for another 5 million points in 189 countries. The company is also focusing on increasing its shareholders’ value.

Restructuration of U.S. Store Portfolio

Gauging its recent decelerating performance in the United States, the company has decided to augment its U.S. store portfolio in fiscal 2019. Management’s strategies will include shifting of new company-operated stores to underpenetrated markets and a slowdown in licensed store growth. Starbucks announced that it would close 150 U.S. stores in the densely penetrated markets in fiscal 2019. This would be nearly triple the number it usually shutters annually. The overall number of stores will continue to increase, but their growth will somewhat slow down.  

Moreover, the company’s Americas segment (accounting for 70% of total revenues), posted 3% comps growth in fiscal 2017, down considerably from 6% in the year-ago period. In the first six months of fiscal 2018, the Americas segment posted 2% comps growth, down from 3% in the year-ago period. Consequently, over the past year, the company’s shares have lost 4.6% against the industry’s rally of 5.3%.

Innovation in Product & Digital Capabilities to Drive Top-Line Growth

Starbucks continues to prioritize product innovation across core beverages while leveraging the strength of its tea and refreshment category, demanded by health-conscious customers. Additionally, under its strategic priorities, the company is digging deeper into its digital capabilities to connect with existing and new customers. The company announced the addition of 5 million new digitally registered customers since April 2018 and 2 million active Starbucks Rewards members. The company’s loyalty membership had reached 15 million in April, up 13% year over year.

As it is, Starbucks holds a leading position in digital, card, loyalty and mobile capabilities. The company’s mobile app is undoubtedly one of the most widely used means of mobile payment in the United States. Strengthening of such digital initiatives is expected to quicken service, increase convenience and enhance customer loyalty, thereby driving mobile payment transactions and spurring traffic.

In fact, the company mentioned that it expects digital initiatives to contribute one to two points of comps growth in the United States in fiscal 2019. Also, the company expects 1% comps growth globally in the third quarter of fiscal 2018.

Efforts to Enhance Profitability & Shareholders’ Return

The company believes that the above-mentioned initiatives would help it generate enhanced returns. Management expects to return roughly $25 billion in cash to its shareholders in the form of share buybacks and dividends through fiscal 2020, up $10 billion from the previously announced cash return in November 2017.

Starbucks’ Board of Directors approved a 20% increase in the company’s regular quarterly dividend and declared a cash dividend of 36 cents per share payable on Aug 24, 2018, to its shareholders of record as of Aug 9, 2018. This represents the eighth annual increase in the company’s regular quarterly dividend.

The company is also trying to improve G&A efficiency by consulting third parties to figure out the growing areas of opportunity.

Our Take

While Starbucks’ increased focus on innovation and shareholder-friendly approach encourages us, it is yet to be seen if the company’s decision of shutting down stores will bring any long-term synergies or not. Moreover, increasing competition from both upscale coffee houses, and lower-priced fast-food chains like McDonald's (MCD - Free Report) and Dunkin' Brands (DNKN - Free Report) has been a potential threat to the company’s top line.

Also, Starbucks is highly vulnerable to the inconsistent nature of consumer discretionary spending. Therefore, the company’s strategic priorities are the need of the hour so that it can tread back on growth trajectory.

Starbucks currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the restaurant space include Domino’s (DPZ - Free Report) . Carrying a Zacks Rank #2 (Buy), Domino’s earnings for 2018 are expected to grow 52.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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