The recent volatility in the markets has been fairly rough on many stocks. But not Starbucks (NASDAQ:SBUX). It’s as if the company is in another universe! Since early October, SBUX stock has gone from $57 to $68.
The latest earnings report was definitely a key. But it also helps that SBUX stock is likely to remain resilient because it has a steady business. Hey, even if there is a full economic slowdown, it seems like a good bet that people will still be drinking coffee, right?
I think so.
Now it’s true that Starbucks stock is not necessarily cheap. Note that the price-to-earnings ratio is about 21x and the dividend is a moderate 2%.
Yet in today’s market, SBUX stock may be a pretty good haven. So let’s take a look at three factors for the bull case:
SBUX Stock Still Has Growth Ahead
SBUX certainly has its challenges. In the U.S. market, the competition is intense, with many small operators as well as large players like Dunkin Brands (NASDAQ:DNKN) and Mcdonald’s (NYSE:MCD). Keep in mind that there has also be lackluster traffic numbers.
Yet SBUX has a valuable brand, which has allowed for better pricing power. For example, during the latest quarter, the same-store sales growth came to 4%, which was above the expectations of 2% to 3%. There was also global growth of 3%, up from the consensus forecast of 2.4%.
To drive this growth, SBUX has made the No. 1 priority the focus on improving the in-store experience. Although, this is not just about changing the design or aesthetics of the locations. Instead, SBUX is making an aggressive effort to improve the operational efficiencies of its stores. Note that the goal is to cut up to 50% of in-store administrative tasks by fiscal year 2019, which will mean more time for employees to focus on customers. Some of the initiatives include automated inventory and better training.
SBUX moved early in adopting mobile payments — and this has paid off in a big way. More and more people are using their smartphones as their digital wallets.
According to research from eMarketer, SBUX is expected to have the most popular payments app, at 23.4 million users. This compares to the projections of 22 million for Apple (NASDAQ:AAPL) and 11.1 million for Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — though of course Starbucks’ app is just for buying Starbucks.
A key, of course, is that SBUX is a daily habit for millions of people. It also helps that the app is tied to a rewards program, which allows for more customer loyalty and personalization. During the latest quarter, the membership base grew by 15% to 15.3 million (in the U.S.) and about 14% of all transactions come from Mobile Order and Pay.
Starbucks’ New CEO
Leadership transitions are always difficult. This is especially the case when the former CEO is a … legend. No doubt, this situation applies to SBUX, which was built by Howard Schultz.
The good news is that the new CEO, Kevin Johnson, has done a pretty good job so far. He has expanded the mobile app to everyone, regardless if they are part of the rewards program. He has also improved SKUs as well as sold off Tazo to Unilever (NYSE:UN) and shutdown locations of Teavana.
But perhaps Johnson’s most important initiative has been to invest in China. True, this is controversial because of the slowing growth in the country and the uncertainty regarding tariffs. But Johnson realizes that he needs to take the long view — and this means not getting antsy about China. SBUX still has lots of runway left in the country and the middle class is likely to see strong gains for many years to come — providing considerable opportunity for sustainable growth.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.