Starbucks Stock Down 35% in 2022, Is There An Upside?

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SBUX: Starbucks logo
SBUX
Starbucks

[Note: Starbucks’ fiscal year 2021 ended October 3, 2021]

After a 35% decline over the last six months, at the current price of around $75 per share, we believe Starbucks stock (NASDAQ: SBUX), the world’s leading roaster, marketer, and retailer of specialty coffee worldwide, could see more gains. SBUX stock has declined from around $114 to $75 in the last six months, largely underperforming the broader indices, with the S&P falling about 20% over the same period. SBUX’s stock declines can be attributed to investors’ concern about rising commodity costs and their effects on the company’s bottom line. Starbucks’ strong presence in China also did not help matters due to the strict lockdown that caused business to slow down. That said, the coffee business is lucrative as it lends itself to repeat purchases, which puts Starbucks in a strong position. The premium coffee products offered by Starbucks involve no significant technological disruptions, and the industry’s slow pace of progress should help Starbucks make it through the long term. In light of this year’s market decline, shares are currently trading at a compelling price-to-earnings ratio of only 20. We believe the coffee company’s stock could see gains based on the fact that it is still growing in the United States and has substantial growth potential in China and beyond.

Starbucks posted a 15% year-over-year (y-o-y) sales increase with U.S. same-store sales growing to 12% in FY Q2 (ended April 3). This is an incredible gain for an established company, particularly during a quarter when the consumer faced considerable headwinds due to inflation. Overall, the company posted global same-store sales growth of 7%, which is again impressive given the weak results from China – where comparable store sales declined 23% during Q2. It should be noted that the company was still able to add 97 new locations in China despite the challenging environment. And, since China is opening back up and returning to normal life as lockdowns in Shanghai and other major cities end, the company plans to drive sales through its digitally enabled outlets there.

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In the fiercely competitive restaurant industry, how does Starbucks stand out?

  • Starbucks’ prior investments in delivery, mobile app, beverage innovation, and its membership program have generated loyalty. Mobile orders and payments were up 20% year-over-year (y-o-y) in the fiscal second quarter, and the delivery business was up 30%.
  • Overall, 66% of Starbucks’ total revenue comes from the U.S. market, where it has 15,544 locations. From now on, the company plans to direct its capital investment toward accelerating store growth with plans for 90% of new locations being drive-thrus. The intent here is to boost profitability as well as lower overhead expenses usually associated with traditional dine-in restaurants.
  • Starbucks has 34,630 stores worldwide at present, yet management believes there are still plenty of opportunities to expand the retail footprint of the company. The company expects to have 55,000 Starbucks locations across 100 different markets by the year 2030 – with 75% of this expansion outside the U.S. market.
  • Starbucks reported 26.7 million 90-day active rewards members in the U.S. as of April 3, an increase of 17% y-o-y.  As a result of its loyalty program, these customers accounted for 54% of revenue at company-owned stores in the U.S. in Q2.
  • Consumers are willing to pay for the products they deem premium, based on Starbucks’ gross margin of 28% over the most recent 12-month period. This high margin gives the business room to absorb higher input costs while still being profitable. Starbucks has consistently been able to raise prices with no adverse effect on demand throughout the inflationary environment in the U.S. – demonstrating the strength of its business.
  • The pandemic has resulted in consumers showing less enthusiasm for sitting down and enjoying hot drinks, and more interest in handcrafted, cold beverages on the go. Consequently, cold beverages are now almost 80% of the company’s business. While the newfound interest in cold beverages is putting pressure on both customers and coworkers – the company is looking into improvements in store design, technology, equipment, worker payments, and beverage selection to fulfill this demand. These improvements should enhance the customer experience, as well as boost profitability.

We have updated our model following the Q2 release. We forecast Starbucks’ Revenues to be $32.9 billion for the fiscal year 2022, up 13% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $3.00. Given the changes to our revenues and EPS forecast, we have revised our Starbucks’ Valuation to $86 per share, based on a $3.00 expected EPS and a 28.6x P/E multiple for the fiscal year 2022 – almost 13% higher than the current market price. That said, the company’s stock appears cheap at the current price.

On its last earnings call, Starbucks suspended its sales guidance because of the lockdowns in China. Going forward, if the present inflationary pressures continue to persist, it is likely that the broader markets may see lower levels in the near term. And, a further dip in SBUX stock can be used as a buying opportunity for better gains in the long run.

While SBUX stock looks poised for more gains in the future, it is helpful to see how its peers stack up. Check out how Starbucks Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

With inflation rising and the Fed raising interest rates, Starbucks has fallen 35% this year. Can it drop more? See how low can Starbucks stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jun 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 SBUX Return -7% -38% 31%
 S&P 500 Return 0% -21% 84%
 Trefis Multi-Strategy Portfolio -9% -26% 189%

[1] Month-to-date and year-to-date as of 6/22/2022
[2] Cumulative total returns since the end of 2016

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