7 Ways Starbucks Stock Wins in 2019 and Beyond

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Starbucks stock - 7 Ways Starbucks Stock Wins in 2019 and Beyond

Source: Starbucks

In the first six months of 2018, Starbucks (NASDAQ:SBUX) had a terrible time getting out of neutral, making owners of Starbucks stock very nervous. And then the world’s largest coffee company delivered a whole bunch of operational initiatives June 19, that included a cut to its third-quarter 2018 and full-year earnings guidance, which had shareholders scurrying for the exits.

By the end of June, Starbucks stock was trading below $49, down 15% through the first six months of the year, prompting my InvestorPlace colleague Vince Martin to suggest that the mere fact the company is ramping up shareholder returns via higher dividends and share repurchases is a big sign management knows the jig is up.

Like it’s done many times in the past, however, Starbucks stock roared back, gaining 33% over the next six months through Dec. 17. Up 15% year-to-date, Starbucks likely will finish 2018 with positive annual total returns in nine out of the past ten years with a 6.1% decline in 2016 keeping from perfection.

How can Starbucks stock win in 2019? Here are seven ways to keep the momentum going.

Ways Starbucks Stock Wins in 2019: Starbucks Rewards

If there is one thing that’s driven Starbuck’s growth trajectory in recent years, it would have to be Starbucks Rewards, the company’s loyalty program.

Just in the last five years alone, the number of rewards members has grown by 50% from 10.2 million in fiscal 2015 to 15.3 million in fiscal 2018.

Remarkably, despite the 15% growth year-over-year in fiscal 2018, the company believes it’s only scratched the surface with many customers who aren’t members still to be signed up. Like Amazon (NASDAQ:AMZN) Prime members, Starbucks Rewards members are vital to the company’s ongoing growth.

Look for the company to continue narrowing its marketing in 2019 to pull these people into the program.

Ways Starbucks Stock Wins in 2019: Juice U.S. Sales

Although China is unquestionably the company’s most prominent country for future growth, the U.S. is still a massive opportunity for Starbucks, but it’s got to be smart about how it goes about it.

“Growth in the U.S. will be much more balanced between same-store comparable [sales] and store expansion,” CEO Kevin Johnson stated at the company’s Dec. 13 Investor Day in New York. “Store expansion will be much more targeted at the markets that are under-penetrated such as the Sunbelt.”

Stores cost a lot of money to open, so with growth harder to find in the U.S. today, it’s got to deliver a customer experience that’s better than its competitors.

For example, it’s rolled out Nitro, the company’s cold brew machine, in 2,500 stores across the U.S., providing customers with a differentiated experience. With about 8,500 company-owned stores in the U.S., Starbucks will be busy in fiscal 2019 getting the remainder up to speed.

Nitro alone will drive a higher average check than it previously’s been able to generate helping U.S. comps continue to grow. 

Ways Starbucks Stock Wins in 2019: Delivery

Speaking of delivery, Starbucks recently launched a partnership with Uber Eats that sees 2,000 of its U.S. stores providing Starbucks products for delivery.

This launch comes after it tested Starbucks Delivers in Miami, a customized delivery approach with drinks specifically intended for delivery that comes with spill-proof lids for hot and cold beverages while also keeping them hot or cold depending on the order.

As a result of this latest initiative, Starbucks customers can now get products in four ways: by walking into a local cafe, ordering ahead through the company’s mobile app, drive-thru, and now, through at-home or office delivery.

One of the big priorities for any service-based business is to make it convenient for the customer. Delivery certainly achieves that. Kevin Johnson expects the 2,000 stores to be up and running for delivery by the end of Q2 2019.

Ways Starbucks Stock Wins in 2019: Keep Growing China

One of the significant steps the company took in 2018 to further its goals in China was to acquire the East China business from its former partners for $1.4 billion, unifying all of Mainland China under corporate ownership, vital to ensuring quality control in its fastest-growing market.

Unlike in the U.S. where the company is trying to balance its growth between same-store sales and new store openings, 80% of China’s growth will come via new stores as opposed to same-store sales.

Although it won’t accept subpar year-over-year sales growth at its existing Chinese locations, the company wants to capture first-mover advantage by blanketing the country with more than 6,000 stores in 230 cities.

The Chinese are very big adopters of digital technology. In the U.S., digital payments account for 40% of its revenue; in China it’s more like 70%, allowing Starbucks to launch its delivery service long before doing so in America.

While China is a tea culture, coffee is catching on. Don’t be discouraged by the occasional weak quarter. Long-term, Starbucks stock will win because the company’s making such a significant investment in the country.

Ways Starbucks Stock Wins in 2019: Mobile Orders & Drive Through

COO Rosalind Brewer Gates mentioned at the company’s investor presentation that its Mobile Order & Pay service along with Drive Thru saw sales increase by 10% over the last two years as customers have embraced convenience.

Starbucks is betting large on drive thru’s — in fiscal 2018 it’s added 339 locations — a counter-intuitive initiative considering some municipalities are banning drive-thrus because they’re bad for the environment. Considering the trend to electric vehicles, however, I’m not sure these municipalities have thought this through (pardon the pun) because eventually, drive-thrus won’t be a planet killer.

That said, most people really ought to get out of their cars and walk into the restaurant, but for those people pressed for time, Starbucks is eager to meet your needs.

And why not? The company’s stores with drive-thru locations are seriously outperforming those without one. Interestingly, the areas where it feels it’s underrepresented, it also has the most opportunity from the drive-thru.

The drive-thru alone could represent a significant bump in future sales.

Ways Starbucks Stock Wins in 2019: Dividends and Share Repurchases

Buybacks have become corporate America’s version of Halloween, handing out goodies to excited boys and girls, knowing full well it’s not a good thing getting them all hopped up on sugar and artificially higher earnings.

Nonetheless, Starbucks knows investors aren’t nearly as patient about its stock as they once were — dividends and buybacks will keep them contented in periods of slower growth.

As you know, when share repurchases are made in large numbers, the share count goes down, and the earnings per share go up. Starbucks’ goal in fiscal 2020 and 2020 is to generate per-share earnings growth of at least 13% annually with share repurchases and cuts to its overhead contributing to that growth.

At the same time, it likes the idea of a 2% dividend yield to accompany capital appreciation achieved through its outsized sales and earnings growth.

Since Starbucks first introduced a dividend in 2010, it’s rarely yielded 2% or more. The company’s new policy should entice income investors into the fold.

Ways Starbucks Stock Wins in 2019: Howard Schultz Runs for President

You’ve probably noticed in recent years that Starbucks has done more television advertising.

Well, if former CEO Howard Schultz decides to run for President in 2020, the company will undoubtedly get more exposure as he travels the countryside educating Democrats about who he is and why he cares about sending the president packing.

The name Starbucks will undoubtedly come up in every conversation and news story … you can’t buy that kind of public relations.

Donald Trump used to brag about moving the stock markets higher — not so much now that the markets are up just 13% in the 23 months since his inauguration — but Schultz is the real deal having delivered most of Starbucks’ 1,350% return over the past decade since retaking the CEO title in 2008.

A lot of people don’t seem to want him to run. I, for one, would have no such qualms. As chief executives go, he’s one of the best.

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

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2018/12/starbucks-stock-sbux-wins-2019/.

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