Starbucks Corporation’s (SBUX - Free Report) solid global footprint, successful innovations, best-in-class loyalty program and digital offerings bode well for the company. Further, the company’s intention to build 10,000 “greener stores” worldwide by 2025, and its partnership with UberEats and Alibaba will continue to drive its performance.
In the past three months, the stock has gained 14.7%, outperforming the industry’s 6.6% growth. However, operating margin contraction over the past few quarters has been a major concern. Starbucks has been also experiencing tepid comps growth in the United States. Let’s delve deeper.
Management continues to focus on increasing its global market share by judiciously 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.
Moreover, digital initiatives like mobile order/pay, delivery services and third-party loyalty partnerships can generate robust sales. Recently, Starbucks and Alibaba announced a historic partnership that will allow seamless Starbucks Experience. Next month, Starbucks will begin delivery services in Beijing and Shanghai with the help of Alibaba's Ele.me platform. The company expects to roll out 2,000 stores in 30 cities in China by the end of fiscal 2018. Starbucks also partnered with UberEats for delivery services. Per the deal, Starbucks lovers in Miami will be able to order coffee and food from more than 100 stores via UberEats.
Starbucks is strengthening its product portfolio with significant innovation across beverages, refreshment, health and wellness, tea and core food offerings. Notably, beverage innovations have been a significant contributor to comps growth for Starbucks over the years. Seasonal offerings like pumpkin spice latte have been in the market for 10 years now and are quite popular. This apart, the company is leaning toward fast-growing categories like Cold Brew, Draft Nitro beverages, and plant-based modifiers, including almond, coconut, and soy milk alternatives.
Management believes that the China-Asia-Pacific (CAP) region will drive much more meaningful business growth over the next five years. Starbucks currently (as of Jul 1, 2018) operates 8,252 stores across CAP. It remains on track to have roughly 11,000 locations in CAP (600 in China alone) in fiscal 2018. Although the company reported soft CAP comps in third-quarter fiscal 2018, we expect the company’s performance in the region to turnaround in the coming days.
Decline in margins has been a major concern for the company. In the first, second and third quarter of fiscal 2018, Starbucks non-GAAP operating margin shriveled 170, 80 and 230 basis points, respectively. The margin contraction in the recently reported quarter can be primarily attributed to a 130 basis points 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.
Zacks Rank & Stocks to Consider
Starbucks currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry are BJ's Restaurants, Inc. (BJRI - Free Report) , Dine Brands Global, Inc. (DIN - Free Report) and Good Times Restaurants Inc. (GTIM - Free Report) , each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
BJ's Restaurants has an expected current-year earnings growth rate of 50.4%.
Dine Brands Global has an expected earnings growth rate of 69.2% for the current quarter.
Good Times Restaurants reported better-than-expected earnings in the trailing four quarters, the average beat being 95.5%.
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