Why Are We Bullish On Starbucks?
The key reasons why we are bullish on Starbucks Corporation (NASDAQ: SBUX) have been listed below:
- Strong Comparable Sales
Starbucks has maintained its lead in the QSR segment by focusing on the rapidly changing preferences of its target customers. Although the company has been consistently increasing its comparable sales growth at or above 5%, the June quarter saw this metric coming down to 4%. However, this is impressive, amid the backdrop of a struggling restaurant industry, with weak sales and traffic, as a result of the decline in food at home inflation, changing preferences towards healthier food options, and a larger proportion of the labor force choosing to work from home, and thus, missing the lunch hour rush. Such an environment has been wreaking havoc on a majority of its peers, while Starbucks continues to remain strong.
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- Continued Strength In China
China is one of the major contributors to Starbucks’ growth. China outshone the other regions in the June quarter, by posting 7% comparable sales growth due to increased traffic. Further, the coffee giant’s operating income was up 22% y-o-y.
Starbucks plans to open 2,500 new stores over the next five years in the region, even as the concerns about the slowdown in China increase. The expansion in China can be understood by the continued success the company sees in the region. By delivering what customers want, the company has managed to grow its China business multi-fold, while other companies, such as McDonald’s and Yum Brands, have been facing either negative or negligible comps growth. By maintaining its dominant 60% share of the Chinese coffee market, Starbucks hopes to push its valuation higher still.
- Gaining Popularity Of Its Teavana Brand
The tea brand, Teavana, has grown successfully in the U.S. and Canada and recently generated growth of 17% in its tea segment over the prior year. Building on this success, Starbucks is now planning to expand Teavana into other regions, such as China and Asia Pacific (CAP). This may turn out to be a game-changer for Starbucks in China. By addressing the $9.5 billion Chinese tea market, which is over ten times the size of the Chinese coffee market, the company strives to increase its tea sales to $3 billion over the next five years.
Source: Euromonitor
The company hopes to establish itself in the tea drinking nation through product innovation, featuring menu items such as black tea with ruby grapefruit and honey, and green tea with aloe and prickly pear.
- Dominant Market Share For At Home Coffee
For Starbucks, at-home coffee share means the consumer product goods (CPG) department. CPG mainly consists of packaged coffee and K-Cups, and more recently ready-to-drink beverages. Starbucks is the leader in K-Cups, even though the industry has slowed down significantly from its peak. By partnering with companies like Pepsi in Latin America, Tingyi in China, and Anheuser-Busch, Starbucks is making efforts at expanding its ready-to drink segment, which is forecast to grow at approximately 10% y-o-y in the next five years. Starbucks already holds a 75% market share in the U.S. ready to drink coffee market, and hopes to claim an additional market share of $1 billion in the premium RTD category through its latest partnerships.
Have more questions on Starbucks? See the links below.
- What Is Starbucks’ Growth Strategy?
- K-Cups, Expansion In China Drive Growth For Starbucks In The June Quarter
- Starbucks Q3 FY 2016 Earnings Preview: Continued Focus On China, Expansion Of The Single-Serve Segment To Drive Results
- Starbucks’ Expansion Plans in China & Digital Channels Drive Growth In Q2 FY 2016
- How Has Starbucks’ Revenue And EBITDA Composition Changed Over 2011-2015?
- By What Percentage Have Starbucks’ Revenues And EBITDA Grown Over The Last Five Years?
- What Is Starbucks’ Revenue & EBITDA Breakdown?
- What’s Starbucks’ Fundamental Value Based On Expected 2016 Results? (Updated After Q2 FY’16)
- Starbucks Q2 FY 2016 Earnings Preview: New Developments In China/Asia Pacific Region To Steal The Limelight
- Where Will Starbucks’ Revenue And EBITDA Growth Come From Over The Next Three Years? (Updated After Q2 FY’16)
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