Is Starbucks Stock a Buy Now?

Starbucks (SBUX 0.47%) practically invented the premium cup of coffee, but it's gone on since then to bring it up several notches with creations like the Frappuccino and the popularization of cold brew.

If a steaming cup of coffee comes to mind when you think of the coffee king, you might be surprised to hear that 75% of sales came from cold beverages over the past few months, and Starbucks has demonstrated once again that it's a powerhouse trendsetter with its finger on the pulse of what its customers want to drink.

It's also been facing some challenges recently and just got itself a new CEO. Let's see where it stands today and whether its stock should be on your buy list now.

Starbucks is having a moment, again

Starbucks' recovery from early pandemic declines has been impressive. It's back to double-digit growth and robust profitability, and there's still a long growth runway.

Revenue increased 12% over last year in its fiscal 2023's third quarter (ended July 2). The increase was driven by a 10% comparable sales increase, with stronger performance internationally than at home -- 24% in international markets and only 7% in North America. 

It opened 588 new stores to surpass 37,000, and management has said that it plans to have 55,000 stores by 2030, lest you think the market is saturated. 

Profitability was healthy as well, with $0.99 in earnings per share, 25% more than last year. Its operating margin widened from 15.9% to 17.3%.

Changing to keep pace

Although Starbucks was pumping along quite well prior to the pandemic, the shakeup in shopping behaviors brought out latent changes in consumer trends that impacted Starbucks negatively. Shoppers have embraced digital channels, and working from home meant fewer trips to get coffee on the way to work.

Two-time former CEO Howard Schultz came back to reconstruct a new plan for a changing era before handing over the reins to Laxman Narasimhan in April. The company is now focusing on opening smaller, digitally based stores in more suburban areas, including order-only stores and more drive-thrus. It's also investing in improved equipment for faster service, something that's been an issue for customers waiting in long lines and frustrated baristas alike. 

Never a slouch in the innovation department, Starbucks has made cold brew a huge part of its business and is experimenting with more dining options as well. Narasimhan said that beverage modifiers, such as cold foam, contribute $1 billion in sales annually.

Another way it's boosting sales is with its upgraded loyalty program. Active membership increased 25% over last year to 75 million globally, including a 15% increase in the U.S. Rewards members accounted for 57% of sales in the third quarter, a 3% gain over last year. The digitally enhanced program has become a major component of growth and can be leveraged going forward to generate higher sales.

What could go wrong

So far, the CEO change looks like it's going well and leading toward attaining management's goals. But there are other challenges for the global coffee giant, not least the unionization of employees. This has been an ongoing issue as workers seek to unionize and Starbucks pushes back. Narasimhan pointed out that barista attrition rates decreased 11% from last year while worker pay improved by 20%, so it's working hard to keep employees happy and away from unions.

Starbucks is also dealing with overall global COVID-19 challenges that aren't entirely over. Stores in China were closed for an extended period, and sales in that region increased 51% over last year as it recovered.

One other point in Starbucks' favor

Starbucks pays a dividend that yields 2.2% at the current price, which is well above the S&P 500 average of 1.54%. Even better, it's been growing quickly and increased 300% over the past 10 years.

Altogether, the good points outweigh the challenges right now. Starbucks stock has soundly outperformed the market over time, and although it's more of a value stock than a growth stock at this point in time, investors can count on it for many years of gains and passive income. That makes it a buy right now.