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Starbucks: Buy the Dip?

By Daniel B. Kline - May 10, 2018 at 11:11AM

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The company has sunk a little after its most recent earnings report.

Starbucks (SBUX 0.33%) shares are trading well below their 52-week high of $64.87.

Even a surprising deal with Nestle -- which netted the company a $7.15 billion upfront payment for the rights to distribute Starbucks' branded packaged coffee and tea globally -- failed to meaningfully move the coffee chain's stock.

That's somewhat surprising since the company promised to use the after-tax proceeds of the upfront payment to accelerate share buybacks. The company now plans to return approximately $20 billion in cash to shareholders in the form of share buybacks and dividends through fiscal year 2020 and it expects those buybacks will increase Starbucks' earnings per share by the end of fiscal 2021.

The market's muted reaction to the news is just more of the same for Starbucks. Lately investors seem increasingly worried that low global same-store sales growth might indicate the company's best days, or at least its highest-growth days, are behind it.

But that's not the case. The company may not have grown same-store sales dramatically in Q2, but it has big plans to continue to grow, and that growth could finally set the stock in motion.

The Starbucks Roastery in Seattle

Adding Roastery and Reserve locations will help Starbucks grow. Image source: Starbucks.

Starbucks' plan for growth

Starbucks has three major growth drivers that should work in the long-term. All three are going to take time to fully pay off, but for long-term investors, they'll be worth waiting for. Here's the company's growth blueprint:

1. Connect with more customers digitally: Starbucks has over 15 million people enrolled in its U.S. Rewards program. Those customers are the chain's diehard followers. Now the company has a plan to collect email addresses from more casual users who may not want to enroll in Rewards or download an app.

When any customer uses WiFi in a Starbucks location, the company now asks for their email as a part of an opt-in program. Once that happens, the chain emails deals to those users about once a week. This simple plan should allow the company to drive more sales and turn casual customers into regulars. 

2. Get huge in China: Starbucks plans to grow to 5,000 stores in China by 2021. It's opening more than one location a day currently, and CEO Kevin Johnson was bullish about the growth opportunity in the country going forward in his remarks in the Q2 earnings call.

"Starbucks entered China nearly 20 years ago, intent on playing the long game by building and growing the business with deep, genuine respect for the Chinese culture, our partners and customers and with empathy for the human experience," he said. "No Western company or brand is better positioned to benefit from the rapidly expanding Chinese middle class expected to exceed 600 million, or twice the size of the entire U.S. population, by 2021."

3. Premium is a big opportunity: Former CEO Howard Schultz is leading the chain's efforts to build out its premium Reserve brand. This includes an effort to add Roastery locations in some of the world's leading cities, building about 1,000 higher-end Reserve stores and adding Reserve bars to around 20% of the chain's cafes. 

"Starbucks Roasteries under design or construction in the iconic, global cities of Shanghai, New York, Tokyo, Milan, and Chicago will join our Seattle Roastery in delivering an immersive, ultra-premium, coffee-forward experience like none other anywhere in the world," Executive Chairman Schultz said in the chain's Q2 2017 earnings release.

These locations should lead to larger checks, because generally speaking, the Reserve products are more expensive. That will help same-store numbers in locations that add Reserve bars and drive new sales at the Roastery and stand-alone Reserve locations.

Be patient

Starbucks has a sensible long-term plan to drive growth, and the company's results on a quarter-by-quarter basis simply don't tell the entire story. Even if Premium falters or collecting emails doesn't help build its digital customer base, the chain should be in a strong position to continue on.

The stock is trading lower than its 52-week high because the market often takes a short-term view. The chain has a strong plan for sustainable growth and this dip in its share price simply does not reflect that.

For patient investors willing to give the company time to execute on its plans, this market dip looks like a buying opportunity. 

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