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Here's Why Starbucks Can Bounce Back From Recent Slump

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Is Etsy (ETSY) Outperforming Other Computer and Technology Stocks This Year?

Is (ETSY) Outperforming Other Computer and Technology Stocks This Year?

Shares of Starbucks Corporation SBUX have declined over the last few trading sessions due to the second high profile departure in a month. Recently, the company announced the retirement of its chief financial officer (CFO), Scott Maw, effective Nov 30, 2018. Notably, Maw has been associated with Starbucks for seven years before assuming the role of CFO in February 2014.

In the past three months, the stock has declined 17.2% compared with the industry’s 1.7% decrease. However, this Zacks Rank #3 (Hold) company seems to be well placed for long-term growth, courtesy of its robust fundamentals to counter intense competition from rivals. Let’s delve deeper.

Banks on Innovation

Starbucks is strengthening its product portfolio with significant innovation around beverages, refreshment, health and wellness, tea and core food offerings. In fact, beverage innovations have been a significant contributor to the company’s comps growth over the years. Seasonal offerings like pumpkin spice latte have been in the market for 10 years now and are quite popular now. Starbucks is also leaning toward fast-growing categories like Cold Brew, Draft Nitro beverages, and plant-based modifiers including almond, coconut, and soy milk alternatives.

Additionally, Starbucks is fast expanding its food offerings in the United States to complement its drinks. Notably, food has become a key growth driver and contributes more than 21% to the company’s U.S. revenues. The company plans to expand its lunch menu and offer locally popular snacks around the world. Starbucks’ much talked about evening program —  food, wine and beer offerings — available at 100 stores is expected to be rolled out in 20–25% of its outlets in the United States by fiscal 2019. This evening program is expected to add $1 billion in revenues by the end of fiscal 2019.

Immense Growth Potential in China & Asia-Pacific

Management believes that China and the Asia-Pacific region will drive much 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 Apr 1, 2018) operates 7,995 stores across China-Asia-Pacific (CAP). 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. Over the next five years, this Seattle-based coffee giant has plans to build 600 net new stores annually in Mainland China, which in turn will double the market's store count to 6,000 across 230 cities. Currently, the company operates approximately 3,300 stores in 141 cities in China. This rapid expansion is likely to triple its revenues and double its operating profit by the end of fiscal 2022 compared with fiscal 2017 number.

Loyalty Program & Digitalization

Starbucks holds a leading position in digital, card, loyalty and mobile capabilities. Evidently, the company’s loyalty cards are gaining popularity. In the United States, its membership increased 11% year over year under the My Starbucks Rewards (MSR) program in fiscal 2017. This positive trend continued in fiscal first quarter 2018 with the membership growing 11% year over year to 14.2 million active members. Customers in the country are using the chain’s mobile app to order and pay for drinks. They are joining the Starbucks’ rewards program as well. We note that MSR is one of the key catalysts of Starbucks.

Furthermore, the popularity of Starbucks’ mobile app in the United States cannot be ignored. Mobile payments represented 12% of U.S. transactions in the fiscal second quarter, up from 8% a year ago.

Concerns

The company’s Americas segment (accounting for 70% of the total revenues) posted 3% comps growth in fiscal 2017, down considerably from 6% in the year-ago period. In fact, transactions remained unchanged year over year and ticket grew 4%. This compares unfavorably with 5% growth in transaction and 1% increase in ticket 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.

Moreover, decline in operating margin over the past few quarters is an added concern for the company. The non-GAAP operating margin contracted 170 bps and 80 bps in second- and first-quarter fiscal 2018, respectively. Management expects a moderate decline in operating margin in fiscal 2018, reflecting additional partner and digital investments.

Key Picks

Better-ranked stocks in the same space are Brinker International, Inc. EAT, Denny's Corporation DENN and Dunkin' Brands Group, Inc. DNKN. 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.

Brinker International, Denny's and Dunkin' Brands have an impressive earnings growth rate of 10.3%, 15.5% and 12.8%, respectively, for fiscal 2018.

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