Two years ago this November, I wrote a piece about Starbucks (NASDAQ:SBUX) and SBUX stock entitled “3 Reasons Why Starbucks Corporation (SBUX) Stock Is Going to $100.”
Spoiler alert: SBUX stock didn’t get there.
I was sure that Starbucks’ best was yet to come, but slower growth in the U.S. combined with confrontational issues between customers and managers at some of its stores, topped off by choppy growth in China, has put investors on the defensive in a big way, negating any possibility of SBUX stock moving higher.
Was I wrong, or was my timing poor? Let’s have a look.
Starbucks Rewards
At the time, Starbucks was taking flack for changing its rewards program earlier in the year from a frequency-based model to a spend-based model, sending cheapskates over the edge.
Here’s what I said about the revised program on March 1, 2016, shortly after implementation:
“Under the old system [frequency-based], I was getting one reward after spending $26.28 (12 times $2.19) while the other customer was getting that same reward for spending $78.84 (12 times $6.57). Under the new system, Starbucks is rewarding both of us equally for spending $62.50 at one of its locations. Those who spend more do better under the new system.”
“Fair is fair.”
How has Starbucks Rewards done since then?
It had 12 million active loyalty members at the time growing by 8% a quarter on a sequential basis with eight million Mobile Order and Pay Transactions per month.
At the end of Q3 2018, Starbucks had 15.1 million active loyalty members, 1.3% higher than in the second quarter, representing 40% of company-operated sales. Mobile Order and Pay transactions represented 13% of U.S. company-operated transactions, 100 basis points better than in the second quarter.
Yes, the growth has slowed on a sequential basis, but as long as it’s adding active loyalty members, shareholders ought to be happy.
China
The company held its first annual Investor Day presentation in China in May. Belinda Wong, the CEO of Starbucks China, said it had 3,300 stores spread across Mainland China, a 27% increase over 17 months.
The company intends to get to 6,000 stores in Mainland China by the end of 2022. In November 2016, the goal was 5,000 stores by the end of 2021, approximately the same rate of growth, so it’s merely added a 1,000 stores to the company’s ultimate footprint in Mainland China.
When you consider that the company expects to triple revenues in the five-year period between fiscal 2017 and fiscal 2022, while simultaneously doubling operating income, I don’t know how investors can’t be cautiously optimistic about the future.
40% Gains
This is where Starbucks really blew a tire.
I argued back in November 2016 that it needed to deliver two years of 40% annual total returns to get to $100 by the end of calendar 2017. It had a total return of -6% in 2016 and just a 5% gain in 2017, falling well short of the goal finishing the year at $56.43, basically flat in the following 13 months.
So, as I write this, SBUX stock is trading at $54, 46% away from triple digits.
Can SBUX Stock Get to $100?
As I stated two years ago, SBUX gets to $100 in one of two ways:
“Either SBUX blows through its profit and revenue estimates in both the U.S. and China over the next two to three quarters or investors give it a higher multiple for those earnings despite only meeting expectations as opposed to smashing through them.”
As far as I’m concerned, Starbucks doesn’t get the latter without achieving the former.
Given how weak the China comps were in its recent third quarter report, I don’t see the company stringing together two to three earnings and revenue beats until late in the calendar year 2019 or later.
So, my recommendation would be to buy a little now — Starbucks always figures out how to reignite growth — and put aside cash for a correction that drops it below $50.
If it moves above $60, I would buy at that point because it’s likely achieved one of the two things it needs to get to $100.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
