Starbucks (SBUX 0.47%) reported its Q4 and full-year fiscal 2023 earnings on Nov. 2. The results were nothing short of incredible, including all-time high quarterly and full-year revenue, higher operating margin, and higher average ticket sales and order volumes.
Starbucks is at the top of its game. A lot of the credit has been going to its rewards program and mobile order and pay -- and rightfully so.
But one of the more overlooked aspects of Starbucks's success has been its ability to evolve its beverage and food menu. Let's take a closer look at the impact some of Starbucks's newer items are having on the business, and where the coffee stock could be headed from here.
Image source: Getty Images.
Sugar, pumpkin spice, and everything iced
Starbucks released its now-famous Pumpkin Spice latte 20 years ago. Before that, the big hit seasonal beverage was its peppermint mocha. Both remain highly popular today. And their reputation may lead you to believe that the holiday season is Starbucks's best time of the year, when in fact it is almost always its Q4 of the fiscal year, which includes July, August, and September.
The period includes the annual return of the Pumpkin Spice Latte, which debuted on Aug. 24 this year. But it also includes the bulk of the summer travel season, where folks are out and about and in need of a cold beverage. In Q3, cold drinks made up around 75% of total drink sales.
If you're familiar with Starbucks's menu, you probably know that seasonal drinks are available in iced and blended variants in addition to their hot option. And that's been the case for a while now, which helps seasonal beverages succeed even in hotter regions.
But what Starbucks has done more recently that has been highly effective is create additional iced-themed spin-offs of popular drinks. Not only are these drinks pricier, but they also differentiate Starbucks from the competition and give its loyal fan base more reason to keep coming back. Starbucks's CFO, Rachel Ruggeri, said the following on the Q4 earnings call:
Our customers continued to favor more premium beverages, creating a new normal as it relates to mix and customization. To fuel this, we continue to lean in with innovation, offering our Iced Pumpkin Cream Chai Tea Latte, which boosted tea sales, as well as Pumpkin Cream Cold Foam, which become a customization favorite with our customers. In addition to our beverage success, we also had another record quarter of food attach, driven by both our core breakfast sandwiches and promotional items such as our baked apple croissant. The success we're having in driving incremental spend gives us confidence that we're delivering meaningful value and a differentiated experience to our customers.
Starbucks continues to release new seasonal beverages and lean into some of its strongest product categories. For example, the Pumpkin Cream Chai Tea Latte is a spin-off of the Pumpkin Spice Latte. But Pumpkin Cream Cold Foam is a topping that can jazz up any drink -- such as an iced cold brew.
In sum, Starbucks has created a level of customization and seasonal excitement unmatched by any of its competitors. And it plays well for hot, cold, and blended beverages, as well as caffeinated and non-caffeinated choices across the coffee, tea, and juice categories.
A game changer
Starbucks's improved food and beverage offerings are having an impact on the company's performance. As management mentioned on the Q4 earnings call, customers are gravitating toward premium beverages. And they are doing so at a time when consumer spending is under pressure and interest rates are high.
Instead of having customers pull back on their discretionary spending, Starbucks is successfully raising prices and seeing higher order volumes. And a lot of that is arguably due to the company's ability to innovate its menu around seasonality, customization, and convenience.
The biggest mistake investors can make on Starbucks stock is assuming the excellent performance is simply due to a return to normal growth from pre-pandemic levels and the expansion of the rewards program and mobile ordering. Although these elements are the greatest contributing factors, the menu improvements shouldn't go unnoticed.
Starbucks is a near-perfect business
If you're a Starbucks investor or considering buying Starbucks stock, you may be wondering if something as silly sounding as pumpkin cold foam really matters that much to the investment thesis. It doesn't -- at least not in a vacuum. But it does when you think of it within the context of the big picture.
Starbucks finished the fiscal year with over 38,000 stores. There are a lot of moving parts when it introduces and nurtures a new food or beverage concept. And Starbucks talked about the rollout of its portable cold foamers to all U.S. company-operated stores on the Q4 earnings call. In short, when Starbucks releases a new concept, there is a lot of risk involved. If it flops, it's going to cost the company big.
Starbucks has always justified charging a relatively high price for its beverages based on quality. But the quality of the competition, from fast food options to other chain coffee shops, has improved dramatically over the last decade or two. Today Starbucks has to justify a higher price based on more than just quality. And that's where unique seasonal promotions come into the fold, paired with the customization and ease of ordering through the mobile app.
Sometimes, when you hear someone talk about a stock, they focus too much on price and where it has been and the recent revenue and earnings. There's value to that. But the most important thing is how a company is doing and where it is headed.
In the case of Starbucks, the business is doing everything investors could hope for, which is responding to customer needs in a way that drives top-and-bottom-line growth. Starbucks is laying a foundation upon which years if not decades of growth can be built. And for that reason, the stock is certainly worth buying now.
