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Can Starbucks (SBUX) Replicate '19 Performance in 2020?

Zacks Equity Research

In an intensely competitive restaurant landscape, Starbucks Corporation SBUX has done exceedingly well. This is quite evident from the stock’s performance in 2019. Year to date, the stock has surged 34.4% compared with the industry’s 19% growth.

Starbucks’ solid execution of several initiatives in the United States and China along with best-in-class loyalty programs and digital offerings are driving the company’s performance. However, contraction in operating margin and soft Channel Development sales remain a concern. Let’s delve deeper.

Growth Drivers

Starbucks continues to benefit from robust performance by the Americas and China-Asia-Pacific segments, store openings, enhanced customer experience and digitalization. In the United States and China, the company witnessed strong demand for its new beverages. Moreover, the company’s strategic efforts helped it to bring back traffic growth. Traffic, which declined in the first half of 2019, improved in the third and fourth quarter.

China Asia Pacific or CAP has now become the fastest growing segment. Notably, improving customer experience via innovative new store designs, up-leveling product offerings and margin expansion through process and supply chain efficiencies are driving CAP performance. China has witnessed comps growth of 1%, 3%, 6% and 5% in the first, second, third and fourth of fiscal 2019, respectively.  Management believes that China and the Asia-Pacific region will drive business growth over the next five years supported by rapid unit growth, growing brand awareness, and increased usage of the digital/mobile/loyalty platforms.

Furthermore, Starbucks has announced a historic partnership with Alibaba for providing seamless Starbucks Experience to drive growth in China. Starbucks began delivery services in Beijing and Shanghai via Alibaba's Ele.me platform.

These apart,  the company’s robust loyalty program is attracting customers. Starbucks holds a leading position in digital, card, loyalty and mobile capabilities. Its loyalty cards are also gaining popularity. In the United States, the company’s membership increased 11% year over year under the My Starbucks Rewards (MSR) program in fiscal 2017 and rose 15% as well to 15.3 million active members in fiscal 2018. The momentum continued in 2019, with the membership improving 15% year over year to 17.6 million active members. Moreover, this loyalty program, launched in December 2018, in China, had total of 10 million members at the end of fourth-quarter fiscal 2019, improving by 45% year over year.

With significant innovation across beverages, refreshment, health and wellness, tea and core food offerings, Starbucks is strengthening its product portfolio. 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.

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