Starbucks Banking On Digital Initiatives & China, Comps Weak
Zacks Investment Research | Jan 02, 2018 09:10PM ET
Starbucks Corporation (NASDAQ:SBUX) has been struggling with tepid comparable-store sales or comps growth in the United States for quite some time now. This is primarily due to persistent decline in the country’s restaurant sales. Soft consumer spending environment in the U.S. restaurant space along with rising costs continue to haunt restaurant chains.
This is evident from the company’s 2.9% increase in share price in the last year compared with 19.9% growth of the industry. Also, the trend in fiscal 2018 earnings estimate revisions is not satisfactory as it has moved down 0.4% in the last 60 days.
Nonetheless, innovative operators like Starbucks with strong fundamentals are continuing to exhibit strength even in a not-so-favorable environment. This Zacks Rank #3 (Hold) company’s strong operating fundamentals that includes successful innovations, best-in-class loyalty program and digital offerings are somewhat helping the company to offset the headwinds. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Driving Factors
In order to counter the soft consumption trend in the United States, management has successfully focused on expansion with plans of adding 900 net new stores in its Americas segment in fiscal 2018, split evenly between company owned and licensed.
Apart from multiplying store count, the company is improving customer experience through innovative store designs, up-leveling product offerings and growing margins through process and supply chain efficiencies.
Starbucks’ operating fundamentals such as solid global retail footprint, successful innovations, best-in-class loyalty program and digital offerings remain strong. The company’s digital initiatives like mobile order/pay, delivery services and third-party loyalty partnerships can stimulate stronger sales trends in the Americas. These initiatives should further drive profit in the long run.
The company is also deploying money in the fastest growing market, China. Starbucks is testing its upscale and super-sized cafe concept in its fastest-growing market of China. Recently, it opened its largest shop ever with the new Reserve Roastery in Shanghai, in a bid to counter sluggish U.S. sales.
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Management believes that China and the Asia-Pacific region will drive more meaningful business growth over the next five years. supported by rapid unit growth, growing brand awareness, and increased usage of the digital/mobile/loyalty platforms. Starbucks currently (as of Oct 1, 2017) operates 7,479 stores across China-Asia-Pacific or CAP. The company remains on track to have roughly 11,000 locations in CAP (600 in China alone) in fiscal 2018.
The company also practices investor-friendly moves. In its recently released earnings call, the company highlighted that dividends over the last six-year period increased an average 24% annually and earnings payout ratio was nearly 50%. They also promised to return $15 billion to shareholders over the next three years.
Indeed, weak comps growth is a cause for concern for the coffee chain giant. In the wake of soft global comps growth, Starbucks lowered long-term financial targets during the fiscal fourth quarter conference call, cutting the annual earnings growth forecast to 12% versus the prior guidance for 15-20%. The company expects global comps of 3-5% and high single-digit net revenue growth (versus prior expectation of 10% or greater).
That said, the company’s strong operating fundamental, successful innovations along with focus on the fastest growing market will help it in maintaining its stature in the coffee world.
Other Key Picks
Investors can also consider stocks like Famous Dave's of America, Inc. (NASDAQ:DAVE) , Good Times Restaurants Inc. (NASDAQ:GTIM) and McDonald's Corporation (NYSE:MCD) .
Earnings estimates for Famous Dave's of America, a Zacks Rank #1 stock, have moved from a loss of 6 cents to earnings of 6 cents for 2018.
Good Times Restaurants is likely to witness 33.3% earnings growth in the current fiscal year.
McDonald's delivered a positive earnings surprise in each of the trailing four quarters, the average beat being 5.21%.
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Starbucks Corporation (SBUX): Free Stock Analysis Report
McDonald's Corporation (MCD): Free Stock Analysis Report
Famous Dave's of America, Inc. (DAVE): Free Stock Analysis Report
Good Times Restaurants Inc. (GTIM): Free Stock Analysis Report
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