The Huge Problem for Starbucks Corporation Stock Is China, Not Racism

Advertisement

Starbucks stock - The Huge Problem for Starbucks Corporation Stock Is China, Not Racism

https://investorplace.com/wp-content/uploads/2016/09/sbuxmsn.jpg

Source: Adrianna Calvo via Stock Snap

Starbucks Corporation (NASDAQ:SBUX) is drawing praise from crisis experts, and Starbucks stock is holding up, after meeting a racist incident at a Philadelphia location with quick action.

The company became a flashpoint for debate and a butt of late night humor after two black men were arrested on April 12 a few minutes after sitting down to wait for a friend.  The incident was captured on a cell phone camera.

The manager was replaced, the company apologized, and it then decided to close all 8,000 U.S. stores for anti-bias training on the afternoon of May 29.  The company had a similar closing in 2008 for retraining at the start of the Great Recession.

As a result, the Starbucks stock has since held its level of about $59 per share. There remain complaints and no one is pretending this will solve the problem of unconscious bias.

But for investors, quick action has rendered the incident irrelevant.

What to Watch for

Starbucks will report earnings April 26, with analysts expecting net income of 53 cents per share on revenues of $5.9 billion. That would represent year-over-year sales growth of 12% and a gain of 17% over the 45 cents earned in the same quarter last year.

But even this shouldn’t determine whether you buy or sell Starbucks stock. For that, look to China.

Starbucks bought back partners in its China joint venture last July, with 3,000 stores in 130 cities, and it is now opening a new store there every 15 hours, including a 30,000 square foot “roastery” in Shanghai.

Analysts are calling the giant roastery a hit, with daily sales double what the average U.S. store makes in a week. If the company really has “cracked the code” on China, it means Starbucks stock can show stellar growth for years.

It would also make the present price of the stock a bargain. Starbucks is now selling at about 19 times earnings, with a dividend yielding 2.03%, in a market where the average Standard & Poor’s 500 member is selling for 24 times earnings.

Many big U.S. brands have tried to make their mark in China, and most have come back with tails between legs.

Yum! Brands, Inc. (NYSE:YUM), for instance, spun out its Pizza Hut, Taco Bell and Kentucky Fried Chicken units there, with over 7,200 locations, in 2016, as Yum China Holdings Inc (NYSE:YUMC) McDonald’s Corporation (NYSE:MCD) decided to sell most of its Chinese business to private equity last year.

China can fall in love with a brand, then fall out of love quickly when supply chain problems cause a scandal. Starbucks, however, is selling a product that doesn’t require refrigeration.

Keep it Level

With China growing, all Starbucks needs do is hold things level in the U.S. to be a star in your portfolio.

The company remains the subject of scams, like fake coupons promising black people free coffee.

Even before the crisis, Starbucks stock had become something of a battlefield stock. One analyst worried about slowing U.S. growth, another about its narrowing moat. It has also brought hand-wringing over the privatization of what is seen as a public space.

They could add that the company also has problems with lunch and had to back off its efforts to sell beer and wine. Stand-alone Teavana stores have also been shuttered. Starbucks stores are very small, only about 2,000 square feet. There’s no room to cook, and pre-packaged sandwiches are never going to sell well against fresh alternatives.

For me, the biggest risk to Starbucks stock is that the highly-publicized trade war with China sparks a backlash against American brands there, which would hit the company hard.  Barring that, however, Gòumǎi gǔpiào (buy the stock).

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/starbucks-stock-china-racism/.

©2024 InvestorPlace Media, LLC