Immediately after becoming the interim CEO of Starbucks (SBUX -1.00%), Howard Schultz suspended the company's share-repurchase program. "This decision will allow us to invest more into our people and our stores -- the only way to create long-term value for all stakeholders," he said in a press release.
The ubiquitous coffeehouse giant just posted its best top-line result ever for a fiscal second quarter -- $7.6 billion -- so the decision probably surprised a lot of investors. Despite a mostly positive quarter, Schultz understands that now is not the time for Starbucks to rest on its laurels, especially in an uncertain economic environment.
Rather, the company needs to invest in building a foundation that will allow it to continue to succeed. That this appears to be its strategy is a good reason to be optimistic about the stock.
Starbucks is playing the long game
Over the five years from its fiscal 2017 through its fiscal 2021, Starbucks lowered its outstanding share count by 20%. It has also raised its dividend payouts in each of the past 10 fiscal years. In the first two quarters of fiscal 2022, Starbucks bought back $4 billion of stock and paid $1.1 billion in dividends. The company will keep paying dividends.
The board of directors is still authorized to repurchase another 52.6 million shares. But quite frankly, management thinks that there are better uses for its cash. The leadership team estimates that buying back stock yields a 10% return. "With Starbucks' treasure trove of global assets, a 10% return is not satisfactory to me," Schultz said on the fiscal Q2 earnings call.
Instead, Starbucks needs to allocate capital to more productive ends. Investing in employee training, higher wages, upgrading store equipment, and developing a partner communication tool, are items that top that list. And given the ongoing unionization push at its cafes, doing more to take care of its people should be Starbucks' top priority right now. This will benefit the business for years to come by reinforcing the company's standing as a top restaurant chain where people like to work.
Management says it plans to invest more in digital capabilities, which are the highest-returning opportunity available. And as part of an effort to accelerate new store growth, 90% of its new locations will have drive-thrus, a sign that Starbucks is adapting to changing consumer preferences. In fact, 75% of orders at company-operated stores in the U.S. last quarter were from drive-thrus, mobile orders, or delivery. Bolstering its physical and digital infrastructure to better meet customer expectations will be critical.
"We are confident that the investments in our partners, our stores, and our brand that we announced today will deliver returns in excess of historic levels and accelerate our growth long into the future," CFO Rachel Ruggeri said during the conference call with analysts. Based purely on financial terms, redirecting capital away from share repurchases and back into the business is the smart move.
While this might initially seem like a defensive move that implies some weakness in Starbucks' financial position, I firmly believe that it is the right strategy to increase the company's value over the long term. Management is seeing record demand in the U.S. and wants to position the business to be able to handle its next stage of growth.
For investors, now is not the time to sell the stock. Starbucks' winning days are far from over.