Starbucks (SBUX 0.47%) likely needs no introduction as its popular caffeinated beverages have made the business a household name. The company generated sales of $33 billion in the last 12 months, indicative of its huge scale.
But this dominance hasn't rewarded shareholders lately since the stock is down 28% from its all-time high and 8% this year. Before buying shares, it's best to gain a better understanding about the business. So here are three things that the smartest investors know about this top restaurant stock.
International presence
One would assume that the United States remains a key market for Starbucks. And that would be an accurate assessment. During the company's latest fiscal quarter (Q3 2023, ended July 2), revenue in the U.S. represented 69% of overall business sales. It's clear that the coffeehouse chain still depends heavily on its home country.
But investors would likely be surprised to know that of Starbucks' 37,222 worldwide locations, 57% are outside the U.S. That makes this a truly global enterprise.
The positive spin on this situation is that Starbucks gets to benefit from higher-growth regions, especially China, where same-store sales surged 46% in the last quarter. Not only can this strengthen the brand's presence, but it can also offset slower gains in more mature markets.
The drawback, however, is that other countries might be dealing with negative events. For example, in China, the government's strict COVID lockdown measures pressured consumer demand and led to a delayed recovery for Starbucks. Things appear to be normalizing, but it shows how the business is more exposed to specific geographic risks.
Looking ahead, the management team is still focused on expanding the store count at a rapid pace. Executives see Starbucks having 45,000 locations open across the world by the end of fiscal 2025 and 55,000 by 2030.
Digital foundation
Starbucks has always been at the forefront of finding ways to integrate technology into its operations to better serve customers. This strategy is apparent when it comes to the company's rewards program, which counts a whopping 75 million members globally (31 million are in the U.S. and 20 million are in China).
The business launched this program in 2009, and it has been a huge hit. That's because coffee is a consumer product that lends itself to repeat purchase behavior, so downloading the Starbucks app and signing up for rewards is a no-brainer decision for customers.
A notable 57% of sales at U.S. company-operated stores came from loyalty members in the latest quarter, demonstrating just how important these customers are. Moreover, by using the massive amounts of data it collects, Starbucks is better able to direct its marketing efforts to keep users engaged, while also informing new food and beverage introductions.
Besides the loyalty program, Starbucks is using technology in other ways, too. As part of Starbucks' Reinvention Plan, the focus is on making automation and efficiency improvements throughout its stores that can make life easier for baristas and speed up service for customers. This can result in better financial performance.
Financial analysis
Investors should take the time to analyze Starbucks' financial situation as well. This is a business that is consistently profitable. Its gross margin has averaged 28.6% in the past decade, which I think does a wonderful job of showing the pricing power that Starbucks has. And its operating margin in the last 10 years has averaged 15.1%.
Besides expanding the store base, management's goal is to continue growing same-store sales (or comps), which measure the revenue from company-operated locations that have been open at least 13 months. Starbucks' are up 10% in the latest quarter. This is a key metric for any retail-based business. As long as comps are heading higher, it's a positive sign that stores are performing better over time.
It's accurate to say that Starbucks isn't going to run into any financial woes anytime soon. The company generates lots of free cash flow, to the tune of $2.6 billion last fiscal year. From the perspective of financial risk, this is a safe investment.
