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Starbucks (SBUX) Rides on U.S. Comps Growth Amid High Debt

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Starbucks Corporation SBUX is poised well for growth on the back of solid digitalization, innovation, U.S. comps growth and strong brand position. The company is optimistic about robust global comparable sales growth. However, high debt and coronavirus woes remain concerns. Let’s delve deeper.

Solid Digitalization Fuels Growth

Starbucks is rapidly expanding its digital presence. The company’s partnership with Alibaba for providing seamless Starbucks Experience is driving growth in China. Starbucks has introduced its mobile order and pay feature — Starbucks Now — to multiple platforms in the Alibaba Digital Economy, which includes Taobao, Amap, Koubei and Alipay. Starbucks customers can also use Starbucks Now feature to pre-order and pay for their favorite Starbucks beverage and food online before in-person pick-up at local stores. This will help Starbucks in expanding presence in China as Alibaba Digital Economy has user base of nearly 1 billion. In first-quarter fiscal 2021, China’s 90-day active members in second-quarter 2021 increased to 16.3 million, reflecting growth of nearly 100% year over year.

Positive U.S. Comps Growth

Starbucks sales have been impacted by the coronavirus pandemic. However, the company is witnessing faster-than-anticipated sales recovery in the United States. In first-quarter fiscal 2021, comps rose 9% in the United States, against decline of 5% and 9% in fourth-quarter fiscal 2020 and first-quarter fiscal 2021, respectively. Transactions comps in the United States improved to (10%) in second quarter from (21%) in first-quarter fiscal 2021. The company anticipates global comparable sales to increase between 18% and 23% in fiscal 2021. Moreover, it continues to anticipate Americas and U.S. comparable store sales to increase in the range of 17% to 22% in fiscal 2021.

Other Growth Drivers

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

Starbucks, which shares space with McDonald's Corporation MCD, Yum! Brands, Inc. YUM and Domino's Pizza, Inc. DPZ, is also benefiting from store expansion efforts. In fiscal 2019, Starbucks added 1,900 net new stores. In 2018 and 2017, the company had added 2,300 and 2,250 net new locations, respectively. Despite the pandemic, the company opened 130 and 260 net new stores in third and fourth-quarter fiscal 2020, respectively. Moreover, the company inaugurated 1,400 new stores in fiscal 2020. In the first six months of fiscal 2021, Starbucks opened 283 net new stores worldwide in the fiscal first and second quarter, respectively, bringing the total store count to 32,943.

Concerns

Investor sentiments were hurt after the company reported lower-than-expected second-quarter fiscal 2021 results. Revenues missed the consensus mark for the second straight quarter. Total revenues were $6,668 million, which missed the Zacks Consensus Estimate of $6,803 million by 1.9%. The company informed that resurgence in coronavirus cases impacted the customer mobility. In China, travel restrictions impacted the stores located in travel centers.

Maintaining liquidity during the pandemic has become a herculean task for most of the companies. Starbucks long-term debt totaled $14,659.6 million (as of Mar 28, 2021), almost flat sequentially. Moreover, the company ended second-quarter fiscal 2021 with cash and cash equivalent of $3.8 billion, down sharply from $5.2 billion in first-quarter fiscal 2021. At the end of first-quarter 2021, it had debt-to-capital ratio of 2.1, compared with 1.98 at the end of first-quarter 2021.

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Dominos Pizza Inc (DPZ) : Free Stock Analysis Report
 
Starbucks Corporation (SBUX) : Free Stock Analysis Report
 
Yum Brands, Inc. (YUM) : Free Stock Analysis Report
 
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