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Is Starbucks Corporation a Buy?

By Demitri Kalogeropoulos - Oct 8, 2017 at 10:00AM

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Why Wall Street pessimism might make this the right time to buy shares in the coffee titan.

If you've been waiting for a better price before buying Starbucks (SBUX -0.83%) stock, your patience has been rewarded. The coffee giant's shares have lost ground in 2017 even as the broader market soared. As a result, investors can purchase Starbucks for about 28 times last year's earnings, compared to a P/E ratio of over 35 in early 2016.

A lot has happened in the past 18 months to lower Wall Street's expectations for this business, though. Below, we'll look at why that pessimism could represent a buying opportunity for long-term investors.

A Starbucks iced coffee siting on a wooden surface, with daffodils in the background.

Image source: Starbucks.

Cooling off

Starbucks is still growing -- just at a weaker pace than the company had expected. Despite having projected confidence that sales would rebound in the second half of fiscal 2017, executives in July were forced to lower their revenue and sales projections. Rather than growing at a 10% pace, Starbucks is on track to boost sales by about 8% this year. Earnings will fall short of the company's long-term target too, expanding by between 12% and 13% compared to the goal of between 15% and 20%.

Like most retailers, Starbucks is seeing pressure on its customer traffic as consumers increasingly pass up shopping trips while doing more browsing online. The coffee giant saw its traffic-growth pace dive to 1% last year from 3% the year before. And traffic is in negative territory through the first nine months of fiscal 2017.

Chart showing Starbucks traffic growth 2012-2017. After five years of positive change, the rate of customer traffic change is negative so far in 2017.

Data source: Starbucks filings. Chart by author. 

Competitive advantages

While it suffers from the same negative trends that are hurting its peers, Starbucks has a few killer assets that should help it more effectively meet these challenges. Take its huge, and growing, opportunity in international markets, for example. The China geography alone should see its store base double between now and 2021, on the way toward eventually eclipsing the U.S. as Starbucks' single biggest market.

The company also has one of the strongest digital ecosystems of any brick-and-mortar retailer. Over 12 million people count themselves as loyalty-card carriers, and a huge proportion of Starbucks customers already use the mobile order-and-pay system. That base of highly engaged users should serve the company well as it launches new digital initiatives including home delivery.

The plan of attack

Starbucks plans to keep setting records over the coming years through a mix of operating and financial wins. On the financing side, it just completed its biggest acquisition yet by buying out the 50% of stores in China that it didn't already own through its joint venture partnership. That aggressive move is the clearest sign yet that executives see the market as critical to their global growth plans.

T

A phone using Starbucks' mobile ordering system.

Image source: Starbucks.

he U.S segment needs a rebound in customer traffic to keep the business in overall growth mode. And an enhanced food offering could be just what the company needs to make that happen. After all, food has been stuck at 19% of sales for the past few years, with beverages at over 70%.

Starbucks hopes to make itself more of a dining destination with a bulked-up lunch offering that's being rolled out in test markets right now. If all goes according to plan, the shift will convince a few coffee fans to make an extra trip to their local cafe during the afternoon hours, lifting customer traffic back into positive territory.

Why buy Starbucks stock?

In any case, it's possible the company will endure a period of growth that's below what shareholders have come to expect from one of the world's most successful retailers. Still, Starbucks retains the same qualities that made it such a good long-term buy, including a world-class brand, industry leadership in the premium-beverage segment, and a stellar management team.

In my view, those advantages will see the company through this latest rough patch. And while returns may be bumpy at times, the stock should reward patient investors who buy today.

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SBUX
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