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Starbucks Corporation Aims Toward Worldwide Name Recognition

SBUX - Starbucks Corporation Aims Toward Worldwide Name Recognition

Source: Adrianna Calvo via Stock Snap

Starbucks Corporation (NASDAQ:SBUX) has returned to double-digit growth. With saturation in its home market and a recent licensing agreement for its consumer products, growth again focuses on international expansion. This path to growth will have to happen in places centered around tea.

As a result, SBUX is now employing an aggressive growth plan in China. The company is also working to build a larger coffee culture. It also owns a line of tea products that it can sell in areas where coffee fails to gain traction. With its plan to serve Asia’s expanding middle class, Starbucks is on its way to becoming one of the world’s most recognized brands.

SBUX Focus Will Return to Its Stores

Those who think the days of growth for SBUX have ended should look at its most recent earnings numbers. In its 2Q 2018 earnings report, it met estimates with earnings of 53 cents per share. This represents a growth rate of 18% in non-GAAP earnings. However, revenues of $6.03 billion showed a 14% growth rate from the same quarter in 2017.

This level of growth shows that changes are afoot for the coffee company. Concerning its consumer goods, licensing will become its primary source of revenue in this area.

A recent deal with Nestle S A/S ADR (OTCMKTS:NSRGY) had that company pay $7.15 billion for the right to market Starbucks products. Nestlé will now sell consumer-packaged Starbucks products under its name. Some of the proceeds from this deal will go toward share buybacks.

More importantly, the additional cash gives Starbucks Corporation more money to focus on expansion. The company faces saturation in the home market and modest same-store sales growth.

Competition from the likes of McDonald’s Corporation (NYSE:MCD) and Dunkin Brands Group Inc (NASDAQ:DNKN) places further pressure on the Seattle-based coffee company. As I stated in a previous article, double-digit growth for SBUX hinges on China.

Catching up to Coca-Cola

In fact, a comparative lack of saturation still separates Starbucks from a more recognized beverage brand, The Coca-Cola Co (NYSE:KO). Analysts consistently rank Coca-Cola as the world’s most recognized brand.

I believe Starbucks will eventually match the recognition and availability of Coca-Cola, except perhaps in the poorest of countries. Still, SBUX has barely scratched the surface of its potential in the developing world, and China has become the company’s next focus.

Starbucks Corporation plans to build an additional 3,000 stores over the next few years, with the store count reaching 6,000 by the end of 2022. SBUX believes the opportunity is 1,200 times that of the U.S.

China has grown to a middle class of 600 million, nearly twice the entire population of the United States. Starbucks believes it can increase China’s average one-half cup coffee per year into the U.S. average of 300 cups per year. This is what creates the “1,200 times” opportunity.

Creating this coffee-drinking culture in a culture that has focused on tea for thousands of years will likely prove challenging. However, the company enjoys 4% same-store sales growth in China, twice that of the U.S. Also, since Starbucks owns Teavana, fully imposing a coffee culture may not be necessary.

In fact, tea has served as the segue into India, which has centered less on coffee. However, coffee consumption in India now grows at double the rate as tea consumption. Hence, India could also see a China-type growth strategy in coming years as well.

Bottom Line on SBUX Stock

With its aggressive growth plan in China (and possibly later in India), Starbucks could become one of the most recognized companies in the world. Starbucks has reduced its focus on both North America and its consumer products. Hence, China expansion has become its most direct path to double-digit growth.

Although China’s culture revolves around tea, the company has seen same-store sales in China grow at twice the rate enjoyed in North America. Also, with its plan to add 3,000 stores in China in the next few years, it will make huge strides in serving China’s middle class.

Combine that with the potential for growth in India, and SBUX could see double-digit growth for years to come. This growth could mean Starbucks eventually matches the market reach of Coca-Cola. Given this potential, it is way too early to say the SBUX growth story is over.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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