After losing almost 40% of its price in the March crash, Starbucks (SBUX -0.35%) stock turned positive year to date just last week. Revenue is steadily improving, and the company beat on sales and earnings in its most recent quarterly report. Since then, the company has continued to modify its model to meet current consumer behaviors, and numbers are likely to look good in the fourth-quarter report, which will be released on Oct. 29. Let's take a deeper look at why now's the time to buy.
Customers love the rewards program
Starbucks launched a new loyalty program in September, and this small change can be a game changer for the company. It's had a rewards program since 2008 when it brought out prepaid loyalty cards, that developed into the improved program in which customers could get stars when loading cash into the Starbucks app. Alternatively, they could use a prepaid Visa (V 0.65%) card. Starbucks revamped the program, and it now offers the option to load a credit or debit card or certain mobile wallets into the app and then scan it to pay.
Image source: Starbucks.
It's worthwhile for Starbucks to provide customers with a competitive loyalty program since almost half of all purchases come from rewards members. Feedback from customers showed that people were looking for an alternative to the prepaid model, and the new app options provide that. Frankly, it's been a long time in coming for such a technically oriented company. But COVID-19 has thrust businesses further into digital, and Starbucks, which considers itself digital-first, has taken action to get more on board.
Mobile ordering increased 22% in the third quarter even without the new rewards program, and we should see a higher number in the fourth-quarter report. This is important for the company as restrictions continue and people are also choosing to stay home.
Finding customers where they are
Starbucks galvanized customer support by providing their caffeine fix in adherence to new government guidelines. It opened more drive-thrus and launched curbside pickup, and it's opening new stores that service more suburban locations. To make the ordering process work efficiently, workers now have a handheld point of sale (POS) device at the drive-thru. As for the changing consumer behaviors, CFO Pat Grismer said, "It may be some time before ... we see volumes return to where they were before, and we're not waiting around for that."
The drive-thrus, which make up more than half of Starbucks' new stores, are already becoming positive. The 3% of stores that remain closed are in metro work areas, and Starbucks is considering closing some of those as many workplaces remain shuttered, and the morning rush of coffee drinkers on their way to work has evaporated.
Grismer said that Starbucks is also developing new locations with more parking to enable easier and faster curbside pickup. Offering designated parking spots where a worker brings an order to a car takes some of the pressure off of the drive-thru option, which often results in a long line. Starbucks sees these changes not as a short-term COVID-19 initiative but as lasting trends that will fuel greater sales.
Happy customers mean higher sales
Grismer noted that comps aren't expected to turn positive until the 2021 second quarter. That being said, U.S. comps continue to trend, rising from a 14% decline in August to an 11% decline in September. China sales moved from a 10% decline in July to flat in August, which means they are probably already positive in that region. The third quarter was the worst of the pandemic, and the fourth quarter will show all of these sequential improvements. Starbucks beat on third-quarter guidance, and that's likely to happen in the fourth quarter as well. The stock's movement has reflected positive investor confidence, and with the share price flat year to date, it's time to buy now before it goes back up.
