How Starbucks is Positioned for Growth
With new restaurant formats and operational efficiencies, we think Starbucks is poised for profitable market share gains in the years to come. We plan to raise our fair value estimate.
Wide-moat Starbucks' (SBUX) fiscal 2020 fourth-quarter update offered a comprehensive outlook for fiscal 2021 and beyond, and while there are still macro and COVID-19 variables at play, we believe recent comparable momentum (notably, U.S. comps moved from an 11% decline in August to a 4% decline in September), early traction with new restaurant formats, and new operating efficiencies paint a picture of massive yet profitable market share gains in the years to come. We plan to raise our $90 fair value estimate by 5%-10% to reflect this upside and see the shares as moderately undervalued.
We believe investors should home in on three takeaways from Starbucks' guidance. First, store portfolio optimization efforts in 2021 (management now expects to close 800 largely urban locations in the U.S. and Canada in 2021, up from 600, while opening up 850 primarily drive-thru and pickup stores) allow Starbucks to remove underperforming stores from the comp base while fine-tuning new store formats before accelerating growth in the future. Second, while it doesn't expect to return to positive comps until the end of the fiscal second quarter in the U.S. and the end of the first quarter in the international segment (a byproduct of convincing holdout consumers to return to stores, something we've heard from other operators), we believe menu innovations, new loyalty program members (90-day active members up 10%), and enhanced digital capabilities like curbside pickup give Starbucks multiple paths to meet or even exceed its full-year comp expectations (17%-22% in the U.S./Americas, 25%-30% in the international segment). Finally, because Starbucks continues to invest more heavily in its business than peers (including employee wages/benefits), 2021 adjusted operating margins may look soft (16%-17%) and profitability will likely lag sales growth, but we anticipate fewer operating disruptions over the near term while offering enough efficiencies to meet its adjusted EPS goal of $2.70-$2.90.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.