Starbucks - Reassessing The Long-Term Case

Kenra Investors profile picture
Kenra Investors
5.1K Followers

Summary

  • Starbucks' app congestion led to a slowdown in comps growth and triggered a correction that lasted about one year.
  • Despite that, growth prospects are still supported by a moderate comps growth, an increasing number of stores and expanding margins.
  • Valuation looks fair and justifies a long-term position.

Some Context - Slowing Growth and App Congestion

Starbucks (NASDAQ:NASDAQ:SBUX) has been a growth investors' darling for many years, but the stock has failed to maintain momentum due to a deceleration in comps growth. The stock is still trading 6% below the top reached in October 2015, although revenue and EPS are significantly higher.

SBUX Chart

SBUX data by YCharts

The reason behind the stock correction is related to the trend in comparable store sales. Comps growth has declined from 7-8% in 2015 to 3% for the last 2 quarters. I think this fully explains why the stock declined from $64 to $50 between October 2015 and November 2016. Declining comps are sometimes a warning sign that tells us the attractiveness of a product, brand or service is declining. Declining comps are different than slowing comps, and we should expect every company to experience periods of slowing growth, due to cyclical or macroeconomic phenomena. In Starbucks case, I find it difficult to find a reason behind the decline that could indicate a structural problem or a long-term challenge. The slowing growth rate of the last few quarters, which is considered an anomaly (per management), is probably nothing more than a short-term effect that could fade away soon. I identified some factors that may explain the recent weakness. The first factor is the overall weakness in retail, as a decline in foot traffic may have had an effect on Starbucks growth, with indirect results on stores located in malls affected by declining foot traffic. Other factors have been explained by management a few times. In particular, management identified 3 main drivers behind the declining comps:

The first is, there is a macro impact from restaurant, away-from-home occasions. And we participate in a big index, and it's not a public index. There are tens of thousands of restaurants that

This article was written by

Kenra Investors profile picture
5.1K Followers
Kenra investors is a 5-star financial expert according to Tipranks and is constantly in the top 5%-10% of world financial experts.Thanks to the experience gained in almost 10 years of activity and study in the stock market and 5 years in professional equity research, I have developed a very sound understanding of many aspects of business, finance and investing. My approach is based on combining fundamental, technicals and macro to deliver meaningful outperformance. I am always open to considering professional collaborations or formal employment opportunities in equity research and/or portfolio management globally. For any purpose, you can message me here on Seeking Alpha or send an email to kenrainv@gmail.com

Disclosure: I am/we are long SBUX. 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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