ii view: Starbucks receives much-needed boost

Shares for this global coffee icon are down by around a third in 2022. We assess prospects.  

Second-quarter results to 3 April 

• Global comparable store sales up 7%
• Revenue up 15% to $7.64 billion
• Earnings per share fell 3.3% to 59 US cents 
• Quarterly dividend of 49 US cents per share, unchanged from prior quarter

Interim chief executive Howard Schultz said:

“We are single-mindedly focused on enhancing our core U.S. business through our partner, customer and store experiences. Given record demand and changes in customer behaviour we are accelerating our store growth plans, primarily adding high-returning drive-thrus, and accelerating renovation programs so we can better meet demand and serve our customers where they are.” 

“The investments we are making in our people and the company will add the capacity we need in our U.S. stores today and position us ahead of the coming growth curve ahead.”

ii round-up:

Coffee chain Starbucks (NASDAQ:SBUX) reported record second-quarter revenues as growth in its core home North American market more than offset a fall in lockdown impacted Chinese demand. 

Quarterly revenue rose 15% to $7.64 billion, beating Wall Street forecasts for nearer to $7.6 billion, buoyed by a 17% increase in North American sales to $5.45 billion. Total global store numbers in the period climbed by a net 313 to 34,460. 

Starbucks shares are up over 5% following the results, having fallen by over 30% year-to-date. The Nasdaq listed coffee house previously suspended its share buyback programme following the return of its former head Howard Schultz. In tandem with the axed share buyback, he also detailed plans to spend $1 billion on wage hikes, improved training, and store innovation during the current financial year. 

Shares for Dow Jones listed McDonald's (NYSE:MCD) are down by around 8% year-to-date and KFC owner Yum Brands (NYSE:YUM) is down by just over 15%. The Nasdaq Composite index has fallen by close to 20%. 

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Although overall international revenues at Starbucks rose 4% to $1.7 billion, comparable store sales in China slumped by 23%, hurt by renewed pandemic lockdowns. Starbucks operates just over 5,650 stores in China. 

Starbucks' operating margin fell to 12.4% from a year ago figure of 14.8%, driven by inflationary pressures, Chinese lockdowns and investments in wages.

Earnings of 59 US cents per share, down from 61 cents in the same quarter 2021, broadly matched Wall Street forecasts. 

ii view:

Founded in 1971 and headquartered in Seattle, Washington, today Starbucks operates in around 80 countries. Of its 34,000 plus stores, some 51% are company operated and 49% are licenced out. Stores in the U.S. and China currently account for 61% of its global store portfolio. 

For investors, rising business costs and a global cost-of-living crisis for consumers cannot be overlooked. The pandemic is still having an impact, with around 16% of its stores in China, while environmental and climate change issues also remain firmly on the agenda of big business. 

On the upside, investment in new stores and store upgrades is ongoing, the company has geographical diversity and the return of its former head should inject vigour back into its strategy. Its customer loyalty membership numbers continue to grow, reaching 26.7 million, while an historic and estimated future dividend yield in the region of 2.5% is not bad in a world of still low interest rates. For now, and with the world’s addiction to coffee showing few signs of abating and analysts’ estimating a fair value price of just over $100 per share, grounds for longer-term optimism arguably remain.  

Positives: 

• Diverse geographical footprint
• Growing store portfolio

Negatives:

• Rising cost pressures
• Covid hindered Chinese outlets

The average rating of stock market analysts:

Buy