Starbucks (SBUX 1.17%) gave investors an early peek into its plans for the fiscal year 2022 when it reported fourth-quarter earnings results on Oct. 29. To hardly anyone's surprise, Starbucks noted that the majority of new locations it intends to add will be international ones.
For several years, Starbucks has been devoting an increasing share of new store development to international markets. Let's look at why the decision to focus on global growth in fiscal 2022 is not surprising.
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International stores generate higher profit margins
For the fiscal year just completed (2021), Starbucks' store-level operating expenses were higher in the domestic segment (50% of store revenues) vs. the international segment (44%). That's to be expected as one of Starbucks' main operating costs is employee wages, and those tend to be higher in the U.S. than in most international markets.
Overall, Starbucks projects it will open 2,000 stores in 2022. That's up by 70% from the 1,173 it's opened in 2021. And of the 2,000 it plans to open, 75% will be outside the U.S. Fueling international growth is China, its largest overseas market. Of the 1,173 stores it's opened in 2021, 654 of them were there.
No doubt, Starbucks is rapidly increasing its popularity in the region. According to management, one in two consumers in China prefers Starbucks when buying coffee away from home. Indeed, Starbucks has attracted 17.9 million active rewards members in China, based on 5,360 total stores. In contrast, Starbucks has 24.8 million active rewards members in the U.S., based on 15,450 total stores.
Using that metric, Starbucks is more loved among consumers in China than it is in the U.S. Oh, and by the way, China's total population dwarfs that of the U.S. You can start to see why management is so keen on the Chinese market.
Increasing profits in the long run
The increasing focus on international growth could fuel increasing profit margins. With new store growth should come higher revenue. As the part of revenue that comes from higher-margin international stores increases, it could boost overall profit margins for Starbucks in the long run.
In the near term, management expects operating profits will face pressure amid rising costs on everything from materials to labor: "We expect fiscal 2022 operating margin to be approximately 17%, below our long-term target, driven by approximately 400 basis points of impact related to the wage investments, coupled with an additional headwind of approximately 200 basis points from a combination of inflationary pressures, other growth investments and discontinuation of government subsidies," Executive Vice-President Rachel Ruggeri said in the company's recent earnings call with analysts.
The company expects its margin to shift up in 2023 to a range of 18% to 19%. To put those figures into context, the highest operating margin Starbucks has achieved in the past decade was 18.1% in 2016. Undoubtedly, one reason for the optimism on profits could be a growing share of revenue coming from international segments.
The stock was down nearly 7% on the day following the earnings release. It might be a good time to put Starbucks on your watch list and consider acquiring shares.
