Starbucks' (SBUX 3.86%) stock rose about 2% over the past 12 months as the S&P 500 declined 15%. That resilience was surprising since the world's largest coffee chain faced persistent headwinds from inflation, COVID-19 lockdowns in China, and unionization demands throughout 2022. But will Starbucks continue to outperform the market in 2023?
What happened to Starbucks in 2022?
Starbucks' revenue rose 11% to $32.3 billion in fiscal 2022, which ended this past October. Its global comparable store sales (comps) grew 8%, driven by a 5% increase in average ticket size and 2% growth in comparable transactions.
Image source: Starbucks.
The gap between its average ticket size and transactions reflects its usage of price hikes in North America to offset the inflationary headwinds. Its North American comps rose 12% for the full year and offset a 9% drop in its international comps. China, its largest international market, suffered a 24% comps decline as it grappled with unpredictable COVID lockdowns.
Despite all those challenges, Starbucks expanded its North American and international store counts by 3% and 8%, respectively, for the full year. However, the inflationary pressure still caused its adjusted operating margin to drop 270 basis points to 15.1% and reduced its adjusted earnings per share (EPS) by 5%.
What's Starbucks' long-term plan?
During its biennial investor day last September, Starbucks laid out its roadmap for the following three years. It expects to open about 10,000 new stores to expand its global store count to 45,000 by the end of fiscal 2025. From fiscal 2022 to 2025, it expects to generate an average of 10% to 12% net revenue growth and 15% to 20% net earnings growth per year.
It believes it can hit those targets by strengthening its relationships with its licensed partners and workers, expanding its mobile ordering platform, launching new cold and custom drinks, and continuing to expand its international business.
What does Starbucks expect for 2023?
Starbucks also provided clearer guidance for fiscal 2023 during its latest conference call last November. It expects its revenue to rise 10% to 12% (even after factoring in a three-percentage-point effect from currency headwinds) as its global comps grow 7% to 9%. It plans to expand its global store count by 7% -- with 3% and 13% growth in the U.S. and China, respectively.
By region, Starbucks expects its U.S. comps to grow 7% to 9% and for China to post "outsized comp" growth against the worst lockdowns of fiscal 2022. The recent relaxation of China's zero COVID policies could amplify that year-over-year growth.
Starbucks expects its operating margin to expand in fiscal 2023, especially in the second half, even as it faces tough inflationary and currency-related headwinds. The unionization pressure in the U.S. has also recently waned, with fewer stores filing petitions to form unions, and could dissipate entirely as Starbucks strengthens its relationships with its licensed stores and their employees. It expects its full-year adjusted EPS to rise at the "low end" of 15% to 20%.
That guidance is encouraging, but it could also easily be derailed by a global recession or other unexpected macro headwinds. In addition, it's still unclear if Laxman Narasimhan, Starbucks' interim CEO who will succeed Howard Schultz as the company's permanent CEO this April, can navigate a deeper economic downturn and other unpredictable challenges.
Does Starbucks' stock still have room to run?
Analysts expect Starbucks' revenue and adjusted EPS to rise 11% and 16%, respectively, in fiscal 2023. Based on those expectations, Starbucks' stock trades at 31 times forward earnings -- which makes it a bit expensive relative to its industry peers. McDonald's, which is growing at a slower rate than Starbucks, trades at 26 times forward earnings.
Therefore, it seems like a lot of Starbucks' near-term catalysts -- including more moderate inflation and reopening tailwinds in China -- have already been priced into its stock. However, Starbucks could still maintain its premium valuation if it hits its fiscal 2023 targets and repeatedly reiterates its goals for fiscal 2025.
I'm not sure if Starbucks will outperform the S&P 500 again over the next 12 months, but I believe it will either hold steady or advance slightly as its stable growth rates continue to make it a safe haven in this wobbly market.
