Now that Howard Schultz is off in his secret lab concocting the next iteration of Starbucks Corporation (NASDAQ:SBUX), investors are asking what will happen in the interim and how long this interim period will be? We can’t answer the second question in regards to SBUX stock, but we can look to earnings to tell us about the first.
First, we want to look at comparable store sales across the region, which tells us if SBUX stock is holding its own or not.
Global comps increased 2%, driven by a 2% increase in average ticket. That was the story all over the world, except in China where comps grew 6%. That is very encouraging news in China, while the 2% number is just okay. Not bad. Not good. Just okay.
But the China news tells us that SBUX can concentrate on growing there in this interim period. China revenues grew 30%!
This led to a 6% increase in revenues to $6.1 billion. Operating income was down 1% to $1.116 billion. We have to skip over net income because there were numerous charges and additions. From an operational standpoint then, SBUX stock is basically flat on income.
The other piece of good news is that active U.S. membership in Starbucks Rewards rose 11% to 14.2 million. Brand loyalty as spoken through the rewards program speaks a lot to consumers who view Starbucks as a regular piece of their purchasing power.
The company opened 700 net new stores, bringing store count to 28,039. So, clearly the world has not had enough of Starbucks.
Over in the Americas, revenues grew 7%, most because of the almost 1,000 new stores opened plus the 2% comps increase. Operating income grew 2% to $979.4 million.
EMEA saw an 8% increase to $284 million, thanks to 365 new stores and a boost from forex. This isn’t a huge area of SBUX stock yet, generating $39 million in operating income, which was down 11%.
When it comes to all of Starbucks’ other product, they call this “channel development.” That means things like food and packaged coffee. Revenue grew 1%, but that is somewhat misleading because SBUX stock sold off its Tazo Tea brand, and some competitive pricing.
In short, we are seeing SBUX management focus on China and streamlining its business. Guidance for the year included opening a whopping 2,300 new stores, and 3% comps. That’s perfectly acceptable.
Starbucks has $4.4 billion of cash and investments offset by $4.57 billion in debt. Free cash flow was $1.4 billion for the quarter, and $2.8 billion for the year. So financially, SBUX stock is on very solid ground.
Looking ahead, Starbucks says EPS will be around $2.50 per share. Thus, Starbucks stock trades at 22x FY18 EPS.
To me, it seems a bit pricey. I see analysts show 15% annualized growth over the next five years, but that seems optimistic. I think Starbucks stock is fine to buy here if you want to hold for the very long term, but I suspect you may be able to get it at a 10-15% discount if this market volatility keeps up.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.