After years of dismal financial results in China, coffee giant Starbucks (SBUX +1.02%) is regaining momentum in that important market, and that could be a good reason to buy the stock today.
Of course, much more goes into the investment thesis for Starbucks. However, I don't believe that investors should downplay just how important China will be to the long-term success of this investment, which is why I want to highlight it here.
NASDAQ: SBUX
Key Data Points
China is back, baby
On Aug. 1, Starbucks reported financial results for its fiscal 2023 third quarter, and they were strong across the business. But the results from China were particularly head-turning: Same-store sales there surged a whopping 46% year over year.
The best way I can illustrate the significance of the rebound in China for Starbucks is by showing a few key statistics from the last few years. Keep in mind that Starbucks' fiscal third quarter ends near the end of June every year (the exact day varies). Therefore, the COVID-19 pandemic hadn't started yet in the fiscal third quarter of 2019, but it was already underway by the fiscal third quarter of 2020.
| Metric | Fiscal Q3 2019 | Fiscal Q3 2020 | Fiscal Q3 2021 | Fiscal Q3 2022 | Fiscal Q3 2023 |
|---|---|---|---|---|---|
| Locations in China | 3,924 | 4,447 | 5,135 | 5,761 | 6,480 |
| Revenues from China | $735 million | $624 million | $905 million | $545 million | $822 million |
Data source: Starbucks. Chart by author.
The table above shows that Starbucks never took its foot off the gas pedal in China, continuing to open new locations at a rapid pace. But revenue in China dropped sharply in several recent years because of the lockdowns in that country due to its zero-COVID policy.
I'll circle back to this shortly. But one argument for selling Starbucks stock lately has been based on its dwindling profits. Over the last five years, its revenues are up nicely. But its earnings per share (EPS) are close to flat.
SBUX Revenue (TTM) data by YCharts.
Lackluster financial results in China, however, have been a huge contributing factor in that tepid EPS growth. This is why its rebound in China is so significant. And it's also why I don't think the aforementioned bear argument holds water.
Starbucks' management never stopped spending to keep stores in China operational and to open new locations. Now, years after the start of the pandemic, the company can finally start reaping the rewards of those efforts. As traffic trends recover to pre-pandemic levels, Starbucks' profits should soar.
To be clear, the table above does show that Starbucks has yet to recover fully in China -- sales per location are still well below where they could be. But with 46% same-store sales growth in fiscal Q3, it's well on its way.
Indeed, Starbucks' fiscal Q3 results support my argument here. In the quarter, operating income for the company's international segment (which includes China) was $375 million -- up a stunning 177% year over year. In other words, profits are roaring back thanks to China's rebound.
The case to buy Starbucks stock
Now, with over 37,000 locations worldwide, one might think that Starbucks is hitting a saturation point. But that's not how management sees it. Management expects to have 45,000 locations by the end of fiscal 2025 and 55,000 by the end of fiscal 2030.
Moreover, Starbucks believes that ongoing growth via new store openings, same-store sales growth, and operational efficiencies could lead to EPS growth of 15% to 20% annually. For perspective, at those rates, the company's profits could double over the next five years.
Some investors might argue that Starbucks' vision won't produce enough growth for the stock to beat the market over the next five years. The critique is fair. And for what it's worth, I don't believe that Starbucks will produce the highest returns out of all the stocks one could invest in. Therefore, there may be an argument for just holding shares rather than buying shares today.
That said, while it might not outperform by a wide margin, I believe Starbucks stock will still outperform for all of the reasons I've discussed here. And that's why it's a buy for me.
