Starbucks (SBUX 0.47%) has navigated a challenging operating environment over the past few years. First, the pandemic forced the company to shutter locations. But now, with its return to solid growth, shareholders are feeling optimistic again.
Starbucks has produced a solid return of 290% over the past decade (as of this writing), beating the S&P 500. But what's in store for 2023? Let's examine the bull and bear arguments for this leading coffee business.
Starbucks bulls
One of the most important competitive advantages that Starbucks has, without a doubt, is its brand. According to a 2022 ranking conducted by Brand Finance, Starbucks had the 29th strongest brand in the world, and was the best in the food and beverage category ahead of McDonald's.
The business is the premium coffee retailer of choice. This position has allowed Starbucks to generate healthy profit margins throughout its history, something that should hold up in the future.
In the most recent quarter, it posted growth in same-store sales (or comps) of 11% in the U.S. And management said that foot traffic was at 95% of pre-pandemic levels, even with price hikes. Again, this operational strength points to a powerful brand that consumers are willing to pay up for.
Strict pandemic lockdowns in China, where Starbucks has 6,021 locations, have significantly hurt sales there. But once these restrictions ease up, management thinks the country will return to historical growth trends, expecting an "outsized comp" increase in fiscal 2023, according to chief financial officer Rachel Ruggeri.
Last year, Starbucks' then-CEO, Howard Schultz, announced a new strategy, the Reinvention Plan. It calls for adjusted earnings per share (EPS) growth of 15% to 20% annually between fiscal 2023 and fiscal 2025, by streamlining the business.
In a world that is increasingly going digital, with consumers who continue to want greater convenience, this new focus from Starbucks should be cheered by shareholders. It's an admission that the company's image as a "third place" to gather (besides home and work) is no longer an accurate way to view its locations.
So it must innovate within its own business model to be able to take care of its customers. As long as the company can do that, Starbucks could make a wonderful foundation for anyone's stock portfolio.
Starbucks bears
As a consumer discretionary stock, Starbucks will undoubtedly be hurt should a recession overcome the global economy this year. The company's strong brand and premium status could mean reduced sales in a downturn.
We're already seeing never-ending layoffs across the corporate world. With workers not having an office to drive to, one residual effect is fewer opportunities to stop at a Starbucks.
To see why the economy matters for investors in the near term, consider that during the Great Recession, Starbucks saw sales decline 5.9% in fiscal 2009. This might repeat in fiscal 2023.
And the company has been dealing with inflationary pressures, paying higher prices for commodities and labor, thus pressuring margins. A unionizing effort at various stores nationwide has forced management to invest more in better wages and training. These should be areas of investment for the business, but they will probably continue to be under the microscope, making it harder to raise profits.
And it operates in a hyper-competitive industry, as consumers have numerous options for caffeinated beverages. There is stiff competition from major chains like McDonald's and Dunkin' Donuts, and an unlimited number of boutique options. Plus, consumers can make quality coffee at home, thanks to Keurig (KDP -0.35%) and Nestlé Group's (NSRGY -0.09%) Nespresso.
Starbucks bears could also argue that management is overly optimistic about its long-term prospects. It believes that by 2030, the business will have 55,000 locations worldwide, up from 35,711 today. The brand is already ubiquitous, so is there really much of a runway for continued expansion?
Potential investors need to weigh these positives and negatives for Starbucks.
