The Return Of Starbucks Begins
by Mark RoussinSummary
- China and US stores, the company's two largest markets are almost fully open under modified hours.
- The company saw 80% of prior year same-store sales recovered in China and 60-65% prior year same-store sales recovered in the US.
- The company has a set of "action plans" to help the company adapt to this post-COVID environment, including adding more drive-thru options.
Over the course of the last week, shares of Starbucks Corporation (SBUX) rose nearly 5% as the company moved to open more stores that were previously shutdown due to the COVID-19 pandemic. The company having already reopened over 90% of China stores now for a month now is seeing strong traffic gains that lead me to believe the company will be on their way to growth rather quickly.
The company was also in the news recently as they have requested some relief on their monthly rent payments due to the slowdown they have seen in recent months. This is in-line with many retailers and restaurants we have seen recently, which has seen retail REITs under pressure of late.
Starbucks Regaining Their Footing
Last week Starbucks released an update letter to their employees giving an in-depth look at how the company is performing as more US store locations come back online. In the letter, CEO Kevin Johnson noted that as stores begin reopening in the US, they have seen positive results, so much so that they have “regained about 60% to 65% of prior year comp US sales while opening under modified operations and reduced hours.” The company has opened greater than 85% of its US locations.
This is tremendously positive for shareholders looking for SBUX to quickly return to growth. Still in my area within Southern California, the drive-thru locations still look the same even given numerous non drive-thru locations opened up nearby, which also seemed to have healthy traffic.
As for China, Mr. Johnson mentioned that 80% of prior year same-store China sales have been recaptured. Both in China and the US, the recovery is ahead of both company and analyst expectations.
Another area that started coming back online last week was the reopening of the company’s 1,550 Japan locations.
Adapting To The New Normal
As the company continues to adapt to the “new normal” that we are living through, they have set out a plan of action. The first plan of action was to reopen stores and recover the business. The second action focuses on adapting to this new normal which in part accelerates the third plan of action, which involves transforming lower performing locations.
Transforming low performing locations and formats was a plan the company already had, but the change was from it being a three to five year plan to a much quicker transformation of 12 to 18 months. This third action is quite intriguing as it will add more drive-thru locations, which will see the popularity grow even more post-COVID.
Another thing changing this past week was the company’s summer menu. This fun filled menu launched that Thursday which has seen a boost to sales in prior years. This year’s menu includes: unicorn cake pop, iced guava passion fruit drink, and a grilled chicken and hummus protein box.
Investor Takeaway
The takeaway from this all is the fact that the company maintains a strong following who are ultra-loyal, which will help SBUX return to growth rather quickly. The company maintains the strongest digital platform in the sector that is used to build a personalized relationship with its more than 19 million members.
As stores are nearly fully open in China and US, and Japan reopening last week, the company is seeing positive traffic thus far and have recaptured an average of 75% same-store sales between their two largest market shares.
The company will see sales and volumes sink in 2020 due to this pandemic, but I believe we will see the return of 2019 volumes in fiscal 2021. Part of this belief is due to the loyalty as well as the company’s heavy focus on drive-thru stores.
As it stands today, shares of SBUX currently trade at a forward P/E of 23.6x, which is below the five-year average of 29x. This is using the FY22 estimates of $3.28, per FAST Graphs, which is a 19% increase from 2021 expectation, which is in-line with EPS growth pre-COVID.
In addition, the company pays a 2.12% dividend yield, one that has grown an average over 22% per year. It will be interesting to see if we get the normal increase this year, one that typically comes in the fall.
However, things are certainly moving in the right direction for the company as they trend higher than expected as US and China stores are primarily back online, albeit at modified hours, but nonetheless the company is moving in the right direction.
Note: I hope you all enjoyed the article and found it informative. As always, I look forward to reading and responding to your comments below and feel free to leave any feedback. Happy Investing!
Author’s Disclaimer: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.
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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.