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Why Starbucks' Stock Could Surge Higher

Starbucks Corp. (NASDAQ:SBUX) could deliver further capital growth after its 24% share price rise over the past year.

The company is investing in artificial intelligence, innovative new products and enhancing its rewards program to boost its financial performance.

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Improving strategy

Starbucks introduced new technology in fiscal 2019 that simplifies in-store tasks for its staff. This gives them more time to engage with customers and provide improved service levels. This could widen the company's economic moat through an improved in-store customer experience that produces greater levels of loyalty.

According to the company's recent fourth-quarter update, investment in its staff contributed to a record high in Starbucks' quarterly customer connection scores. It also led to an increase in the number of visits per customer to its stores in fiscal 2019.

The business released innovative new products in the fourth quarter. For example, it rolled out its Nitro Cold Brew range of beverages across its U.S. stores and introduced a new cold pumpkin beverage product. They contributed to a five percentage point increase in its U.S. comparative sales growth in the fiscal 2019 fourth quarter, and could help to differentiate its range of products versus sector peers.

Increasing competitive advantage

Starbucks ramped up its focus on artificial intelligence in 2019. It plans to gradually utilize artificial intelligence to make personalized recommendations to its customers, which could increase its sales per customer. It plans to use artificial intelligence to optimize the number of staff working within its stores to improve its efficiency, as well as to determine inventory levels to potentially improve its cash flow.

The company's rewards program has continued to grow. In the fourth quarter, for example, its active member numbers grew 15% to 17.6 million. This growth was supported by Starbucks' launch of a range of smaller rewards in the third quarter that may appeal to its less frequent customers.

Its increasing number of rewards program members provides the business with additional data that can be used to optimize its product offerings. Additionally, it could increase the company's competitiveness versus sector peers.

Potential threats

Starbucks opened over 600 net new stores in China during fiscal 2019, so it now has over 4,000 stores in the country. It plans to open an addition 600 stores in China in fiscal 2020. This will increase its presence in the country at a time when China's gross domestic product growth rate is declining. The International Monetary Fund recently revealed that China is experiencing a structural slowdown, and that its growth rate is expected to slow in 2020. In addition, geopolitical uncertainty in Hong Kong could lead to declining sentiment among middle-class consumers in China. This may disrupt Starbucks' growth prospects in the region.

In response, the company is investing in increasingly innovative layouts at its stores in China. This includes a Starbucks Now store in Beijing that opened in July . It provides customers with digital screens to enhance the speed and efficiency of the ordering process. The business plans to open additional Starbucks Now stores across major cities in China in 2020.

Additionally, it has improved its rewards program benefits in China. It now offers exclusive products and tailor-made gift experiences to its customers. This contributed to a 45% increase in its active loyalty program members in China in fiscal 2019, which could widen its economic moat.

Outlook

Market analysts forecast the company will deliver 13% growth in its earnings per share in fiscal 2021. The forward price-earnings ratio of 27 suggests Starbucks offers good value for money on a long-term investment outlook.

Disclosure: The author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.