Lockdowns at the onset of the coronavirus pandemic certainly hurt Starbucks (SBUX 1.00%) as consumers saw their daily routines disrupted, including their morning coffee or afternoon pick me up.
But with two-thirds of Americans fully vaccinated now, things are different. The result is record demand for Starbucks here in the U.S., and this is changing the way founder and interim CEO, Howard Schultz, is positioning the business going forward.
Let's take a closer look at this top consumer-discretionary stock.
Image source: Getty Images.
Boosting growth plans
Starbucks was already a powerful brand before the pandemic. But over the past couple years, consumers have shown a relentless preference for digital ordering. This is in stark contrast to what propelled the business in the past, which was to transform its retail footprint into a "third place" where people could spend time outside of work or home.
The convenience of digital ordering was put on full display throughout the depths of the pandemic. It's all about increasing the accessibility, while reducing the friction, for customers to make purchases. This change in consumer behavior is sticking, and the momentum continues. Mobile order and pay was up 20% in the fiscal second quarter, and the delivery business was up 30%. This helped push U.S. same-store sales growth to 12%.
In the U.S., Starbucks counted 26.7 million 90-day active rewards members as of April 3, up 17% year over year. And these valuable customers accounted for 54% of revenue at U.S. company-operated stores last quarter, demonstrating the success of this program.
To embrace the new way customers are interacting with Starbucks, management has decided to suspend share repurchases to direct capital toward digital investments. Accelerating store growth is a priority with plans for 90% of new locations being drive-thrus. This situation can boost profitability as well by lowering overhead expenses usually associated with traditional dine-in restaurants.
"Our newest class of drive-thrus will integrate new store designs, technology, including more handheld devices and equipment improvements that will increase efficiency, speed of service, and, we believe, deliver even greater profitability in the future," Schultz mentioned on the earnings call.
Facing a possible slowdown
Despite the strong demand domestically, there is reason for investors to temper expectations a bit. With inflation still elevated, the Federal Reserve's plan to raise interest rates throughout 2022 could slam the brakes on the U.S. economy. And this has the potential to negatively impact Starbucks' business, especially because the company sells premium food and beverage products consumers might shy away from in tougher times.
Ultimately, though, the demand trend here in the U.S. is a positive sign for shareholders as it signals there is a major opportunity to keep growing revenue in Starbucks' most important market.
