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Why Starbucks Is Up 19% in 2018

By Daniel B. Kline - Nov 13, 2018 at 4:04PM

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The company has faced fears about its continued ability to grow.

Sometimes it's hard to compete with outsize expectations. Starbucks (SBUX 1.48%) has been such a dominant player in its space that investors expect continuous sales growth, innovation, and expansion.

The company generally delivers on those things, but investors can be harsh critics, punishing companies for seemingly minor missteps or signs that growth may slow. That's largely what has happened to Starbucks for most of 2018, with things turning around in November when the chain provided pretty strong answers to any questions investors had.

Shares in the company closed 2017 at $57.43 and hovered around that until the company presented its fourth-quarter earnings after market close on Nov. 1. Shares closed at $58.63 on Nov. 1 and opened Nov. 2 at $61.99, closing the day at $64.32. They have continued that upward pattern, closing at $68.60 on Nov. 9.

A barista works in a Starbucks in China.

Starbucks has been expanding rapidly in China. Image source: Starbucks.

How is Starbucks doing?

The company has been rapidly expanding in China, but its same-store sales in the United States have sometimes come in below expectations, causing some investors to worry that Starbucks has peaked in its home country. Those concerns had been a drag on shares leading into its most recent earnings report.

That changed when the fourth-quarter and full-year numbers were released. It's hard to find anything negative in the coffee chain's full-year results, which were universally strong:

  • Global comparable-store sales were up 2% (that was due to prices going up by 3%, not increased traffic).
  • U.S. same-store sales rose by 2%, as did China's.
  • Net revenues rose by 10% to $24.7 billion.
  • Earnings per share came in at $3.24, a 64% increase.
  • $8.9 billion was returned to shareholders through dividends and stock repurchases.

The only negative thing you can really say about the results is that they lagged for the first three quarters and improved in Q4. That's something CEO Kevin Johnson addressed in his remarks in the Q4 earnings release.

"Starbucks' record Q4 performance reflected meaningful improvement in virtually every critical operating metric compared to Q3," he said. "As we enter fiscal 2019, we are executing against a clear growth agenda, with a focus on our long-term growth markets of the U.S. and China."

So why are shares up?

The past year has been one of transition for Starbucks. Longtime CEO and recent chairman Howard Schultz left the company in June. That stoked some investor fear because the last time he left, in 2000, things did not go well, prompting him to return in 2008.

That probably added to fears caused by numbers being mildly weak during the first three quarters of the year. In addition, the sheer size of Starbucks in the U.S. made questions about its ability to continue to grow sales seem reasonable.

The Q4 numbers squashed any worries investors had. Net revenue was up 11% to $6.3 billion, U.S. same-store sales rose by 4%, and China's comparable-store sales moved to up 1% from down 2% in the year-ago quarter. The company also saw EPS rise 13% to $0.62 from $0.56 in Q4 2017.

Nothing to worry about

Starbucks' 2018 share price slide largely came from investors worrying if the chain can continue to grow. The ongoing expansion in China (where the chain is adding about one store a day) and improved U.S. and China same-store sales numbers answered those questions.

The reality is that Starbucks has a long-range plan that's much more important than any one quarter's numbers. In addition to massive growth in China, the company also continues to refine its digital model globally, and it's working to drive traffic to lesser-visited dayparts. In addition, the coffee company also has a major new deal with Nestle to expand its presence in grocery stores, supermarkets, and convenience stores, and it plans to increase penetration of its higher-end (and higher-priced) Reserve Roastery brands.

Johnson is pursuing multiple plans to grow the company and drive sales. That puts Starbucks in the enviable position where not everything has to go right for it to be successful in the long term.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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