Howard Schultz may be under the biggest presidential delusion since Herbert Hoover’s re-election run — but that doesn’t mean the company he founded is suffering.
<strong>Howard Schultz</strong>
Since the start of the year, Starbucks (NASDAQ:SBUX) stock is up 7.4%. Shares that were trading near $50 in August are now trading near $70.
In its most recent quarterly report, sales were up 9% year over year, comparable store sales were up 4%, operating margins were 22% in the Americas and, in China, sales were up 18%. Net income came in at $760.6 million, 61 cents per share, on revenue of $6.63 billion.
Other than uniting voters against him, this may be Schultz’ most impressive achievement. Since stepping down as SBUX executive chairman last summer, the company hasn’t missed him.
A Stronger Franchise
It’s a stark contrast to Schultz’ first retirement, in 2000, when he was forced to swoop in and rescue the company. He closed all stores for three hours to retrain the staff, then set a new strategy, clearing out the executive suite.
This time, his long-term strategy of technology, geographic expansion, and huge Roastery stores seems to be working. CEO Kevin Johnson is a former Microsoft (NASDAQ:MSFT) executive and he has moved the company decisively away from the Schultz “personality cult” into a sustainable franchise whose China operations have even growth investors interested.
Starbucks now has four women on its board, most recently COO Rosalind Brewer, and enough self-confidence to feel it can beat a Chinese Starbucks clone called Luckin, even while Luckin considers itself a U.S. IPO.
This Should Not Be
Given the growing competition, Starbucks stock should not be doing this well.
Coffee has been discovered by Wall Street to be as potent an ingredient as sugar — something you can buy for a few bucks per pound and get hundreds of dollars for in the form of finished drinks.
Germany’s Riemann family, through JAB Holding, has been buying up every non-Starbucks breakfast joint it can find, doing a partial spin-out of Keurig, as Keurig Dr. Pepper (NYSE:KDP), to bring public investors into the party. Brazil’s 3G Capital bought Tim Horton’s, the Canadian chain, as part of their Restaurant Brands International (NYSE:QSR).
The woods are also still full of new coffee entrepreneurs and there are thousands of one-off stores, including many that have managed to extend their hours with beer, wine, and even music, in ways Starbucks failed at.
Starbucks has changed America as no restaurant chain has since McDonald’s (NYSE:MCD), and Schultz is the founder (even if he didn’t found it).
All this continues to fuel the fire of Starbucks bears, who insist the company is slowing down despite a lack of evidence. Goldman Sachs (NYSE:GS) downgraded Starbucks recently, with a price target lower than its February 8 opening bid of $69.14.
The Bottom Line on Starbucks Stock
Howard Schultz is a divisive character, even in his hometown of Seattle. Like a figure in an Aaron Sorkin screenplay, he’s a man convinced of his own righteousness, even while he appears out of step with the times.
So while your barista insists “Howard doesn’t work here anymore”, take a moment to admire what he built, and what continues to build there. Starbucks packaged coffee products now have global distribution, and I have been guilty of pounding the table, for the stock during its recent run-up.
At its current price Starbucks is fully valued, at nearly 31 times trailing earnings. But the dividend is fully backed by profits and pays 2.1%. It has risen 50% over the last five years.
You may be criticized if you bet on “Schultz for President,” but you’re not stupid to own this stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.
