Investors haven't been thrilled with the latest operating results from Starbucks (SBUX 0.47%). Shares sat out of the 2023 rally and have trailed the S&P 500 so far this year, too.
That performance could mean excellent returns from here if you don't already own the coffee titan's stock. Even if Starbucks is in your portfolio, you might want to add to your position. Here are a few good reasons why.
1. Balanced growth
Starbucks reported a robust 5% comparable-store sales increase for the fiscal Q1 period that ran through late December. That result stacks up well against McDonald's (NYSE: MCD) and its 3% uptick this past quarter.
It's always good news when your business is outgrowing industry peers. Better yet, looking beneath that headline figure shows even more evidence of solid demand at Starbucks' cafes.
The chain is getting its growth through higher customer traffic and increased average spending, for example. McDonald's had to rely entirely on increased spending to counteract weaker customer traffic in the core U.S. market.
Starbucks' relative success here points to more market-share gains ahead and good momentum into 2024, even though the casual dining industry has been slowing. "Despite headwinds, our brand is very strong," CEO Laxman Narasimhan said in a press release .
2. Strong earnings
The news is more clearly positive when it comes to Starbucks' finances. Profit margin jumped by more than a full percentage point last quarter to 16% of sales, leading to a 20% spike in non-GAAP earnings. "I am proud of the significant margin expansion and double-digit earnings growth we delivered in our first quarter," CFO Rachel Ruggeri said, "as it underscores our multiple paths to earnings growth."
One of those paths involves pushing outside of Starbucks' traditional metropolitan focus into more rural locations, anchored by the drive-thru and to-go channels that are popular with consumers right now. The chain is getting a lift from its loyalty program, too, and by the launch of many more premium-drink options.
3. The price is right
The bright side of the recent stock slump is that you can grab Starbucks stock for an attractive discount today. Shares are trading for 3x sales today, down from a price-to-sales ratio of nearly 4x sales less than a year ago. Its price-to-earnings multiple has dipped to 26x revenue from 36x sales over that same period.
Sure, the company is seeing new demand pressures right now due to slowing growth in the core U.S. market. These aren't permanent challenges, though, so it makes no sense to abandon the stock right now.
Be sure to keep an eye on customer traffic trends for signs that Starbucks is losing market share to rivals. To date, though, the chain is boosting that metric with help from a steady flow of innovative beverage releases and improvements to the shopping experience.
Another metric worth watching is Starbucks' operating profit margin, which recently crossed 16% of sales, putting it right on pace with Chipotle's impressive rate. The bullish investing thesis relies, in part, on this metric continuing to rise in 2024 and beyond. Otherwise, investors might be disappointed with Starbucks' returns this year, as they were in 2023.
