Starbucks Corporation (NASDAQ:SBUX) stock may finally break out.
After spending years mired in a trading range, company efforts to maintain growth are finally bearing fruit. Workers will receive an additional pay increase this year. Moreover, the company is finding success in the world’s largest consumer market.
With increasing profit and successful markets left to tap, SBUX is finally poised to resume stock gains.
SBUX beats on earnings, disappoints on revenue
For the first quarter of 2018, Starbucks earned 65 cents per share. This beats the consensus estimate of 57 cents earnings per share (EPS) by 8 cents. It also represents a 27% increase from the same quarter last year when the company earned 51 cents per share. Still, shares initially fell as revenues came in at $6.07 billion, $110 million less than expected. Also, comparable store sales increased by only 2%. Investors had hoped for a higher increase in this area.
Once a high flyer, Starbucks stock has plateaued in recent years. Revenues continue to increase overall, despite falling in Q4 2017. SBUX has seen average revenue increases of over 11% per year over the last five years. While annual EPS has failed to crack double-digit percentage growth in recent years, Starbucks management’s full-year guidance now calls for 21% growth year-over-year. Most recent growth has been driven by Starbucks-brand products — same-store sales have only seen modest increases.
Consequently, the stock has traded in a range since 2015. Today, it trades at a price-to-earnings (PE) ratio of 31, only slightly higher than the S&P 500. The earnings beat confirms estimates that double-digit EPS growth likely to return. With the reported 25% year-over-year increase, investors will likely find a 31 PE ratio comfortable.
Starbucks announced it would spend a total of $250 million worth on wage and benefit increases for its employees. Employees will receive a second wage increase in addition to the annual wage increases afforded its employees. They’ll also receive a partner/family sick time benefit as well as an additional stock grant. The company also plans to add 8,000 retail jobs and 500 manufacturing jobs.
Growth in China and other countries will bolster SBUX stock
SBUX has also addressed its biggest problem–saturation. While it has supplemented domestic revenues by adding brands such as La Boulange and Evolution Fresh, further growth in North America is limited. Hence, the company is looking more internationally. Just under half of Starbucks 27,000+ stores are located outside of the United States.
Not surprisingly, China shows the most significant potential for expansion. Starbucks operated over 2,800 locations in China as of 2017 and plans to have 5,000 stores by 2021. The company has also entered India with Tata Starbucks. India’s population has grown almost as large as that of China. However, since Indians tend to prefer tea over coffee, Starbucks has relied on its ownership of Teavana to carry the Indian market. So far, SBUX had opened about 100 stores as of 2017.
Starbucks has been working at international expansion for more than 30 years. The company opened its first Canadian location in Vancouver in 1987. Moves into Japan and Singapore in 1996 were its first ventures outside of North America. With these stores, it has carved out a niche that appears to work outside of the U.S.
Many American retailers such as Subway, McDonald’s Corporation (NYSE:MCD), and Costco Wholesale Corporation (NASDAQ:COST) have found success amid the cultural difference. Others –such as Wal-Mart Stores Inc (NYSE:WMT) — have suffered humiliating failure. Target Corporation (NYSE:TGT) couldn’t succeed in Canada even with its similar retail culture.
So, the fact that Starbucks could transcend different culture speaks well of the brand.
Final thoughts on SBUX stock
Long stuck in a trading range due to market saturation, Starbucks has finally found a growth market that can drive both profits and SBUX stock higher for years to come.
In what looks to be a benefit of a lower corporate income tax, Starbucks will return much of the tax savings in the form of raises and benefits increases for employees. Moreover, it will increase hiring, both in retail stores and in its manufacturing of Starbucks consumer products.
Still, the incentive to grow SBUX stock has long involved adding stores. With slow growth in same-store sales saturation in the U.S. and Canada served as an obstacle left little room for EPS growth. With store growth taking off in China, however, now owners of SBUX stock can now profit from Chinese consumers enjoying the same Starbucks experience that has long been popular in North America.
If growth in China continues, it could easily have more Starbucks locations than the United States. Either way, with China and other markets wanting the Starbucks experience, the growth of SBUX stock appears likely for decades to come.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.