It’s been a turbulent year for American coffee chain Starbucks (NASDAQ:SBUX). The firm has seen its share price shed $10 since the beginning of the year as a slowdown in sales in both the U.S. and China weighed on investor sentiment.
While there’s no doubt that SBUX stock is facing some worrisome headwinds in its key markets, the firm’s financial strength and ability to grow and change means the coffee chain is likely to continue growing and delivering shareholder value over the next decade.
One of the biggest issues for SBUX stock investors is the fact that the firm’s most recent earnings results showed a 2% sales decline in China, a key growth market for the chain.
During the first and second quarters, Starbucks was able to post a 6% and 4% rise in Chinese sales, so the Q3 results were a shock to shareholders. Admittedly, the slowdown in China worries me as well because a huge part of Starbucks’ future growth strategy hinges on the Chinese market.
However, I trust management when it says that the third quarter results are a “perfect storm” of challenges. Starbucks battled against issues with third-party delivery services, something that the company should be able to rectify with its new Alibaba (NYSE:BABA) partnership during the second half of the year.
On top of that, Starbucks’ management also claims that competitors’ price cuts hurt the firm’s traffic. Again, that’s worrying as a SBUX shareholder, but the question is whether that kind of price gouging is sustainable.
Starbucks has nearly two decades worth of experience building a brand that people identify with and are loyal to, so once the price competition starts to die down, the firm can carry on with its operating model.
Building Out the Brand
Another big concern was slowing growth in the U.S., where the majority of the market has been saturated. Starbucks is planning a few store openings during the back half of the year, but most are unlikely to make a meaningful impact as they are in lower population-density areas.
However, that doesn’t mean growth in the all-important North American market will come to a halt. SBUX is working on several initiatives that make the company’s future growth in America look promising.
Perhaps the most promising of Starbucks’ efforts is the company’s mobile-ordering and loyalty plans. The firm has built out one of the most successful mobile apps and customer loyalty programs in the industry, and the company is continuing to push forward with digital sales initiatives.
Aside from that, Starbucks is rolling out new store concepts and food options that could generate new revenue streams during the second part of the day. Diversifying away from just coffee could help boost store traffic as well as attract new customers and give repeat customers another reason to stick to the brand.
Good Things Come to Those Who Wait
There’s no denying that SBUX is in a bit of a rut at the moment, but if you’re willing to trust that management’s initiatives will be enough to reignite sales, then it’s worth holding on to SBUX stock through the turbulence. The back half of 2018 is unlikely to see much of an impact from the company’s latest initiatives, so investors will have to wait until 2019 for a noticeable improvement.
With that said, SBUX has proven itself to be shareholder friendly, and the fact that the firm pays out a 2.77% dividend yield will make the wait for improving sales a little easier. Not only that, but Starbucks’ healthy cash flow and low payout ratio suggest that the dividend has plenty of room for growth as well.
Bottom Line on SBUX Stock
Starbucks may not be delivering the kind of growth investors are used to, but a turnaround looks to be around the corner. SBUX stock is a great long-term bet, and the company’s dividend makes it worth holding on to despite the turbulence.
If you believe in the firm’s growth initiatives and are willing to wait out the storm, now could be a great time to add Starbucks stock to your long-term portfolio.
As of this writing, Laura Hoy was long SBUX.