Shares of Starbucks (SBUX 1.00%) stock are down 35% from their all-time high and hovering around a 52-week low as broader market volatility clashes with company-specific problems.
It's no secret that the Starbucks unionization discussion is intensifying. Starbucks' sudden leadership change raises even more questions. And with Starbucks suspending what would have been the largest share buyback program in company history, there's added pressure for Starbucks to deliver on its promises.
Despite these challenges, the world's largest coffee chain remains one of the most powerful consumer brands in the world. And it has plenty of ways to grow its business in the decades to come. Here's why Starbucks' licensed stores are its ace in the hole for growing its international business.
Image source: Getty Images.
Store breakdown by type and geography
Starbucks finished the first quarter of fiscal 2022 with 17,385 company-operated stores and 16,932 licensed stores for a total of 34,317 stores. Licensed stores are not operated by Starbucks and do not have Starbucks employees but instead feature Starbucks equipment and fixtures, food and drink supplies, and merchandise, and essentially look and feel like a normal Starbucks. They tend to be in airports, supermarkets, and convention centers instead of stand-alone locations and typically say, "we proudly serve Starbucks." It's worth mentioning that Starbucks, like Chipotle Mexican Grill but unlike McDonald's, doesn't franchise. Starbucks-licensed store operators have less say than franchisors, which allows Starbucks to have more control over how its brand is received internationally.
17,429 of Starbucks' stores are international (over 5,500 in China), while just 16,888 are in North America. But while international stores outnumber domestic ones, Starbucks generated 75% of its Q1 fiscal 2022 operating profit from those in North America. Starbucks makes a lot more money from its company-operated stores than its licensed ones -- and 59% of its North American stores are company-operated whereas 43% of international stores are company-operated.
However, the downside of company-operated stores is that they are more capital-intensive as Starbucks is the one renting or leasing the location and absorbing the operating costs, not the operator of the licensed stores.
A capital-light business model
In order to reduce its risk and boost margins, Starbucks has shifted more and more of its international growth toward licensed stores. During its most recent earnings call, the company announced that it has successfully converted all of its South Korean locations to licensed stores after selling its 50% stake in a Korean joint venture to long-term license partners. In its fourth-quarter fiscal 2021 earnings release, Starbucks announced it had realigned its Latin-American and Caribbean markets to fully licensed operations.
The shift from corporate stores to licensed ones makes sense, given the goals made in Starbucks' 2020 investor presentation on Dec. 9, 2020. Starbucks set what it calls a 10/20/30 goal starting in fiscal 2024, which would include long-term non-GAAP (adjusted) earnings per share (EPS) growth of 10% per year, a 20% non-GAAP operating margin, and a return on invested capital (ROIC) of 30%. Licensed stores would play a critical role in achieving this goal. Starbucks CFO Patrick Grismer said the following in Starbucks' 2020 investor presentation:
There is another scenario that could materialize as we explore strategic options to further streamline our company, including the licensing of certain markets outside the U.S. and China. These potential licensing opportunities could enable us to further enhance the overall financial profile of our company. Assuming we license these additional markets and redeploy the capital, non-GAAP EPS growth will remain at least 10%, non-GAAP operating margin will approach 20%, and ROIC will approach 30%. This, of course, is predicated on our ability to identify the right operating partners for these markets to transact at commercially reasonable terms and to deploy the capital in an accretive manner. In each case, our overriding goal is to ensure that the Starbucks brand is growing and thriving in every market where we're present.
In sum, a higher mix of licensed stores vs. corporate stores would likely reduce the revenue and operating income per store but could allow Starbucks to reinvest more money into its business and build even more stores. If this trend begins to accelerate, investors should make a mental note not to overweight the importance of store count as licensed stores are very different -- in terms of cost, margins, and profit -- from corporate stores.
Unanswered questions
When Howard Schultz stepped back in as Starbucks CEO on April 4, he made it very clear that he would be more focused on growing Starbucks' core business and improving its culture than appeasing shareholders. As a result, he suspended Starbucks stock buybacks -- which would have been around $13 billion over the next three years -- in favor of investing in the business.
Aside from leaning into its successful rewards program, mobile ordering, drive-thrus, and Starbucks Pickup stores, Starbucks could benefit from exploring the licensing option in more locations overseas. Threats of unionization only apply to company-operated stores, meaning that Starbucks could consider opening more licensed stores in the U.S. going forward if the labor issue gets worse than it already is.
Schultz will likely provide some insightful commentary on the direction he plans to take Starbucks during the company's second-quarter fiscal 2022 earnings call on May 3. Investors who closely follow Starbucks should consider tuning into the call and listening specifically for Schultz's comments on unionization, inflation, the ongoing effects of the COVID-19 pandemic, the plan for future dividend raises despite a lack of share buybacks, and the role that licensed stores can play in the company's growth strategy, both domestically and internationally.
