On Wednesday, Dec. 9, Starbucks (NASDAQ:SBUX) held its Investor Day. So far, the market is impressed: Starbucks stock is up 18% year-to-date.
The market is right to see the Investor Day news as bullish. Starbucks’ profit guidance for the next few years supports the fundamental case for Starbucks stock. SBUX admittedly isn’t cheap, but the guidance provides another reason why it shouldn’t be.
The importance of last week’s commentary goes beyond the numbers as well. Starbucks after all was one of the biggest and earliest victims of the novel coronavirus pandemic. It had to shut down stores in China even before the pandemic had really hit U.S. stores.
Over the past few quarters, the company and its business have slowly rebounded. But what Wednesday shows is that the company is done playing defense and is getting ready to go back on offense. Given the company’s five-decade history of successful growth, that might be the best news of all.
Steady Progress
The pandemic kneecapped Starbucks. For fiscal 2020 (ending Sept. 27), global same-store sales fell 14% year-over-year. Earnings fell at a faster rate, no surprise given the nature of the restaurant model, in which lost sales hit the bottom line in a big way. Adjusted earnings per share declined nearly 60% year-over-year; adjusted operating margin was almost halved.
The short-term weakness obviously isn’t a surprise. Customers were less willing to go into a Starbucks. “Work from home” changes no doubt disrupted the routines of many consumers who bought a Starbucks regularly on their way to and/or from the office.
But we’ve seen a slow, if steady, recovery. In the fourth quarter, same-store sales dropped just 9%. Notably, Starbucks saw its average ticket size rise a sharp 17%.
Just as importantly, in China, same-store sales were down just 3%. China saw the pandemic earlier and thus is later in its recovery, and that figure shows where the U.S. and European markets are likely to head.
Even during the darkest days of the pandemic, I was recommending Starbucks stock as a play on the eventual recovery. Even though recent numbers are far from great, we’re seeing that case play out.
Strong Guidance
The guidance given at Investor Day only strengthens the case. Starbucks is seeing a sharp rebound this fiscal year: adjusted EPS should return to a range of $2.70 to $2.90. That’s basically in line with the $2.83 posted in FY2019.
The company sees growth of at least 20% the following year, even with the difficult comparison against an extra week in FY2021. From there, adjusted EPS should grow double-digits in each of the two following years.
We’re looking at a pretty easy path to at least $4 in earnings per share. That in turn suggests likely solid dividend increases, even though Starbucks stock already yields 1.8% — much better than the 10-year Treasury bond.
Numbers aside, it’s how Starbucks is planning to drive this growth. Same-store sales should return to the plus side of the ledger — but Starbucks also is ramping its store count. In the U.S., the store count should rise about 3% a year. In China, the figure will rise over 10% annually.
Again, Starbucks is going back on offense as the pandemic recedes. And the company sees greater white space for expansion than skeptics might have expected. That’s particularly true in China, which remains a massive opportunity for the company.
The Cases Against Starbucks Stock
Skeptics could have two retorts against the bull case following Investor Day.
First, they could argue that Starbucks’ guidance is exactly that: guidance. Management might well be overpromising.
Second, growth seems priced into Starbucks stock, which still trades in the range of FY2022 earnings, based on guidance.
Neither argument is necessarily unreasonable. Like any stock, SBUX has risks, and both execution and valuation qualify at the moment.
But I’m happy to take on those risks, even with the big rally in Starbucks stock of late. Starbucks has been one of the best stocks in the entire market since it went public in 1992. Management has been spectacular in terms of driving both same-store sales growth and expanding the Starbucks footprint. That team easily has earned the benefit of the doubt going forward.
As for valuation, SBUX isn’t cheap. And this is not the kind of stock that’s going to triple in three years. The company is too big and too mature for those kinds of returns at this point.
That said, there’s still upside here, if Starbucks hits its growth targets. That’s been the case for almost three decades now — and Starbucks has hit basically every target so far. I don’t think this time will be any different.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
