Starbucks' Digital Strategy To Drive Significant Growth With Customer Loyalty

| About: Starbucks Corporation (SBUX)

Summary

I am bullish on SBUX as its proven global brand equity is driving profitable growth.

The company's digital strategy allows one to one marketing which will significantly enhance the loyalty program.

SBUX should be able to deliver double digit EPS growth through 2017 which drives my target price of $72 (18% upside from current levels).

I am bullish on Starbucks (NASDAQ:SBUX) at current levels as I believe the company will deliver strong sales growth through 2016 and has significant long-term growth vectors firmly in place. Specifically, the reasons I'm a potential buyer include:

  1. Proven global brand equity driving profitable growth
  2. Increasing return of capital to shareholders
  3. Ability to generate strong free cash flow
  4. Continued double-digit EPS growth
  5. Long-term strategic plan (the "intersection of digital and physical")

Starbucks has had an incredible run over the past five years, but there's still room for growth and my 1-year price target is $72 (upside of 18%) based on 2017E EPS of $2.20 and a P/E multiple of 33x.

SBUX Chart

SBUX data by YCharts

Proven global brand equity driving profitable growth

Starbucks continues to leverage its global brand and drive profitable growth. Revenue has grown at 13% YoY and with expanding margins and share buybacks has resulted in EPS growth of 21% YoY.

Based on the drivers outlined below, I expect EPS to continue growth at low-double digits over the next several years.

(Source: SBUX IR deck)

Increasing return of capital to shareholders

Starbucks has distributed more cash to shareholders each year over the past 4 years.

Dividends have grown at a pace to keep the yield between 1.0 to 1.5% over the past five years.

Share repurchases have helped drive EPS and are expected to continue in the coming years based on management's outlook.

(Source: SBUX IR deck)

Ability to generate strong free cash flow

Starbucks has grown free cash flow per share from $0.75 in 2012 to $1.73 by the end of 2015, an increase of 130 percent.

Starbucks' current free cash flow yield is 2.8% and is expected to grow significantly over the next few years.

The divided cash payout ratio is below 50%.

SBUX Free Cash Flow Per Share (<a href=

SBUX Free Cash Flow Per Share (TTM) data by YCharts

Continued double-digit EPS growth

Management expects double-digit EPS growth to continue in 2016 with 15-20% YoY forecasted. The is driven by top line growth of ~10%.

The company targets a return on invested capital of >25%.

(Source: SBUX IR deck)

Intersection of digital and physical

Starbucks has several interesting initiatives to drive returns over the long run.

According to CEO Howard Schultz on the Q4 conference call,

"By anticipating and beginning to invest many years ahead of the mobile technology curve, Starbucks today is defining customer-facing and apartment-facing mobile and retail experiences of the future. And the technology innovations we are introducing are further strengthening our brand, improving our efficiency and in-store execution, increasing our profitability, enabling us to further extend our lead over competitors, and, most importantly, enabling us to deliver an elevated Starbucks experience to our customers."

(Source: SBUX IR deck)

According to ZD Net, one-to-one marketing is the Holy Grail for Starbucks and significantly enhances their loyalty program. With personalized marketing, Starbucks can directly up sell and serve customers offers that are relevant to them.

Valuation

SBUX PE Ratio (Forward) Chart

SBUX PE Ratio (Forward) data by YCharts

Starbucks' valuation is down from its recent peak of 37x forward EPS and is justified given the implied growth rate in EPS.

My price target of $72 per share is based on 33x 2017E EPS of $2.20, which is more or less in line with Street consensus.

As Starbucks rolls out its digital strategy and offers a world-class loyalty program, I believe the EPS risk is skewed to the upside and buying shares at current prices is attractive.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SBUX over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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