Starbucks Corporation (NASDAQ:SBUX) has recently been a story of saturation at home and opportunity abroad. With the perception that there’s a “Starbucks on every corner” in the U.S. and Canada and slow same-store sales, Starbucks stock has inspired little confidence as its price has stagnated for the last 2.5 years.
However, growth in overseas markets, particularly China, is positioning SBUX stock for a return to frothy growth.
Saturation at Home Has Starbucks Looking Abroad
To be sure, Starbucks has hit a saturation point in the U.S. With about 14,000 stores in the U.S. alone, finding a town (and in some cases a corner) without an existing Starbucks remains difficult. Moreover, competition from the likes of McDonald’s Corporation (NYSE:MCD) and Dunkin Brands Group Inc (NASDAQ:DNKN) have cut into the company’s profits.
Also, some of the political statements made by management alienated some of its customer base. While the company has begun producing its own products, other product lines failed to generate the growth that over four decades of company expansion gave to Starbucks.
Capitalizing on store successes, Starbucks has taken a page from the playbook of Walmart Inc (NYSE:WMT) and developed a more international focus. It has operated outside of North America since the 1990s. Despite going into markets that consider American coffee culture an anathema (if they have a coffee culture at all), it’s found success in many markets.
Moreover, Starbucks has opened stores in many markets with a tradition of tea drinking. Its purchase of Teavana Holdings, Inc. in 2012 may help in its expansion into Asia.
Starbucks decided to close its Teavana stores in the U.S. following poor sales and changing shopping habits. While the future of the Teavana brand remains unclear, its ownership of this brand gives Starbucks the means to reach customers who prefer tea.
China Has Become a Huge Driver for Starbucks Growth
However, as I mentioned in a previous article, the company is finding success in China. China has become SBUX’s second-largest market. On average, a new Starbucks opens in China every 15 hours. Its China store count recently topped 3,000 stores and is predicted to reach 5,000 by 2021.
Moreover, same-store sales rise at a 6% rate in China, compared with only 2% in the U.S. China also has more than four times the population of the U.S. and less than one-fourth as many Starbucks stores. Given these demographics, the Starbucks China story may just be getting started.
The financials have begun reflecting this success. Starbucks stock now trades at a price-to-earnings (PE) ratio of about 18.7. This remains much lower than the PE ratios of past years. Moreover, after slowing in recent years, double-digit earnings per share (EPS) growth has returned.
The company earned $1.97 per share in 2017. Consensus estimates for 2018 place EPS at $2.49. Analysts also expect EPS to rise to $3.81 per share by 2021. Assuming these predictions hold, the increased profits will likely to propel Starbucks stock higher.
Final Thoughts on Starbucks Stock
Although few people seem to notice, the froth has returned to the Starbucks growth story. As saturation and competition become issues at home, Starbucks goes about the business of opening stores abroad.
Much of the focus on SBUX’s foreign growth has been on places like Colombia, Italy and India. Since the feelings about the American coffee culture lies somewhere between disinterest and hostility in some places, how Starbucks performs in these countries remains to be seen.
However, China remains the international success story to which investors should pay attention. With over 3,000 stores, same-store sales growth, and the potential to become a larger market than the U.S., success in China alone could put Starbucks on the map regardless of whether the company succeeds in other countries.
For investors who wake up and smell the coffee on Starbucks stock, they can buy now and earn profits before everyone else starts to notice the froth.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.