Starbucks (SBUX 0.57%) has found the magic formula for more than a good cup of coffee. It is getting customers back into its stores in droves, generating higher sales and profits. And it's expecting more of the same in the future.
Yet its stock is up only 3% so far this year, underperforming the market. Here's why that could change, and why now is a good time to buy.
The new strategy is working
Former CEO Howard Schultz came back last year to take over as Starbucks was experiencing pressure due to the pandemic. Although it was rebounding, it needed a new growth strategy as the world embraced new trends in digital and artificial intelligence. And as the company became even bigger, it also needed streamlining and efficient growth plans.
Using Schultz's keen understanding of the business, along with company data and research, Starbucks has developed a new growth strategy. It uses technology to upgrade the store experience in two distinct areas: digital ordering and beverage customization.
Starbucks stores were previously successful as a "third place," a meeting center for customers who wanted to hang out together outside of the home or office. But as more people work from home at least part of the time, trends have been moving toward coffee on the go with a focus on mobile orders and quick service.
So Starbucks is offering new store layouts in large cities, where office workers need a quick turnaround, and it's opening more stores in smaller cities to benefit from work-at-home trends. Meanwhile, delivery is demonstrating strong growth. All of this is a response to a shift from pre-pandemic behavior and is heavily dependent on a strong digital backbone.
As for beverage customization, Starbucks' gift to coffee drinkers everywhere, the resulting long prep times were frustrating customers and baristas alike. The company is investing in new equipment to speed up the process and offer better customization without sacrificing quality.
This has helped increase capacity even at its busiest times of day, leading to unit volume surpassing pre-pandemic levels. Many companies have managed sales increases with price hikes, as has Starbucks. But its volume is increasing as well.
These focal points contribute to revenue generation, increased efficiency, and stronger margins and higher profits. In the fiscal third quarter ended July 2, revenue increased 12% over last year's quarter, with 10% growth in comparable-store sales. Operating margin widened from 16.9% to 17.4%, and earnings per share (EPS) rose 19% over the year-ago period to $1.
The opportunity is still huge
The improvements also open up new opportunities. Starbucks is a leader in beverage innovation, which it has to be to keep customers engaged. It embraced cold beverages as part of its drink lineup, and they accounted for 75% of sales in the fiscal third quarter. Improved equipment with better features is a gateway toward innovation. Starbucks is always launching new products, and it's leaning into cold drinks this summer to fuel engagement.
Food had always been a side order at stores, but food sales are increasing, as customers view Starbucks as a one-stop shop for coffee and a snack or meal. There's a lot of opportunity here, and the company is looking at ways to grow this category.
The natural growth plan is to add more stores. It passed the 37,000 count in the third quarter with 288 net new stores, and sees the opportunity for 55,000 by 2030.
All of these plans together mean there's a lot more in store for Starbucks shareholders in the coming years.
The price looks right
But there should be plenty more upside for the business right now in 2023, as well. Management expects comps growth in the low to mid-single digits and "record breaking" new store development. Starbucks stock dropped immediately after the release of its latest quarterly report because sales, at $9.2 billion, were below average analyst expectations of $9.3 billion, even though EPS exceeded expectations of $0.95. But in the days afterward, the share price quickly went higher.
At the current price, the stock trades at a price-to-earnings ratio of 31. That's a reasonable valuation considering its performance and opportunities. It also pays a dividend that yields 1.6%, making it valuable for income investors.
As Starbucks continues to demonstrate top performance, and investors see its value, the stock could soar in the back half of 2023.
