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Stock Strategist

Grande Growth for Starbucks

As restrictions ease, we expect a sharp jump in demand.

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We believe that Starbucks (SBUX) is poised for a sharp rebound after widespread dine-in restrictions and a shift toward virtual work and schooling resulted in revenue falling 11.3% during fiscal 2020. The company’s efforts to streamline its retail footprint, improve operational efficiency, and invest heavily in digital channels are well placed, and a strong recovery in the Chinese market--with comparable sales up 5% in the fiscal first quarter--points to a quick uptick in demand as restaurants reopen. We recently raised our fair value estimate to $106 per share from $100 after digesting first-quarter results, and we assess the shares as fairly valued.

In our view, China remains alluring, with coffee consumption increasing steadily but remaining well below per capita figures seen in the United States and Western Europe. Should the Chinese market bear a similar proportion of cafe concepts at maturity as does North America, we believe that it offers some $55 billion in upside for market participants, with cafe penetration of 2.7% falling well below the North America equilibrium of 10%-12% of food-service sales, as we calculate it. Starbucks’ strong international portability remains relevant to our growth thesis, as the company strives to create a market for premium espresso beverages in what have historically been tea drinking cultures in Asia-Pacific.

Sean Dunlop does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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