If you own shares of Starbucks (SBUX 3.38%) right now or are on the verge of buying them, congratulations. You're obviously a forward-looking investor capable of blocking out the present headwinds.
The company is currently in its third quarter of 2020, and it expects the COVID-19 pandemic to reduce quarterly sales by at least $3 billion. For the year, it expects to earn between $0.33 and $0.73 per share, down 82% from 2019 at the midpoint. These are some of the worst numbers the coffee company has ever released. You must have a vision of a brighter future: Why else would you presently invest in Starbucks?
It's a strong business with a long track record. Consider that over the last 30 years, comparable-store sales have grown every year except two: 2008 and 2009. It had $26.5 billion in fiscal 2019 net revenue, up 7% year over year. And it returned $12 billion to shareholders through share repurchases and dividends.
These are all good reasons to own Starbucks stock. But you may have missed some recent developments that only strengthen your long-term bullish thesis. And some changes are expected to happen quickly, making a compelling case for buying shares.
Back to growth in China
Opening new locations, known as unit expansion, is key for many retail and food service investments. Unit expansion for Starbucks is modest in the U.S. but it's been stellar in China: 17% year-over-year growth in fiscal 2019. There are currently 4,400 locations in China, which is a lot. But it's only half the locations in the U.S., despite China having around four times as many people.
I believe Starbucks can deliver stellar unit expansion in China for years to come. New restaurant openings were temporarily paused due to the COVID-19 pandemic, but the company has already returned to growth. It added 57 net stores in April and May alone, and remains on track to add 500 net new stores this year. That's really good, but I think just 10 specific locations are the key to Starbucks' future in China.
The company opened eight Starbucks Now locations in China in recent months, bringing the total to 10. These locations are a smaller format with a stripped-down menu including only those items that travel well. That's because, while one could dine in at a Starbucks Now, it's designed to primarily be a to-go order location. In a lot of ways, the concept is similar to Luckin Coffee.
Luckin's actual growth is under scrutiny after confirmed insider fraud. However, it's likely the chain was experiencing hypergrowth, just not at the pace it claimed. If so, it's a strong indicator that a digital-first to-go model is exactly what the Chinese consumer wants. As such, Starbucks is right to suddenly prioritize the development of Starbucks Now.
It's closing 400 locations
If I'm keen on Starbucks' growth in China, why am I saying the coffee giant's stock is a buy even as it closes 400 locations in the U.S.?
Starbucks is running with an idea in the U.S. called Starbucks Pickup. It's similar to Starbucks Now in China. The company has decided cities don't need a bunch of traditional cafes. Rather, they need a mix of traditional and new small format to-go locations. It's closing 400 locations over the next 18 months and replacing them with the small format.
When we talk about the lasting effects of COVID-19, this is a good example. Dining rooms and large real estate are liabilities when they can't be used effectively. Physical distancing restrictions exacerbate the problem, but this was true prior to the coronavirus. Companies like Starbucks and Wingstop were already experimenting with this kind of store, to better leverage labor expenses and real estate.
In the future, some are even betting that restaurants will pop up without dining rooms. Uber's former CEO Travis Kalanick is investing his fortune in something called ghost kitchens, a business model that provides kitchen spaces for restaurants to rent, allowing them to effortlessly launch overnight with an exclusively to-go operating model.
Renewed urgency at Starbucks
When things are going well, it's easy to be lulled into complacency. And things have been very good at Starbucks for years. But the coronavirus seems to have given the company a renewed sense of urgency. There's no mention of these smaller format stores in its 2019 annual report, and scant mention of Starbucks Now in the fourth-quarter earnings call. Today, however, these initiatives are a major priority.
Eighteen months is an aggressive timetable for the Starbucks Pickup project, something that wasn't even on the radar a few months ago. It shows Starbucks is urgently becoming leaner as it grows, and that's something I believe will reward shareholders. Shares look like a buy today. In fact, even if you own the stock already, it's time to buy more.