Starbucks (SBUX 0.47%) might be the most recognizable coffee chain on the planet. It's certainly the largest, and it's on its way to becoming the largest restaurant chain in the world. But what happens at that point? Investors look for growth. There's more to come at Starbucks, but is it close to saturation? What would that mean for investors? And where can you expect the coffee megachain to be three years from now? Let's see.
Ushering in a new era in coffee creation
As Starbucks has expanded to become a global force in coffee, it's dealing with problems ranging from rising food costs to pandemic closures to unionizing employees. As well-oiled as its model is, there are regional issues that crop up in a company that's reaching a worldwide audience.
Starbucks' problems started acutely with the onset of the pandemic, but it unveiled cracks in its system. Customers aren't looking for a place to hang out as they were before, but instead, they want quick coffee they can order digitally. The world changed, and Starbucks needed to change, too.
It's not the first time it has dealt with changing trends, and it mobilized to face the challenge with a new CEO and a full evaluation of how to meet demand.
Management has identified several ways to improve, and it's calling its reinvention plan "the Triple Shot with Two Pumps." Some of its plans include a better way to customize beverages quickly, an upgraded loyalty program, and new menu options.
Large company, large problems, large opportunity
But some problems persist and aren't easily fixed with better coffee. Union efforts continue to take root, and management has clashed with vocal employees. Its Middle East business is suffering through geopolitical conflict.
Although the company reported revenue, comparable sales, and profit increases in fiscal 2024's first quarter (ended Dec. 31), these issues had a not insignificant impact on total growth. As Starbucks implements its new strategy and tames flareups, it's in a state of flux. Growth is also decelerating. Starbucks stock is down 10% over the past year.
On the flip side, the coffee chain continues to open stores at a rapid pace, including 549 in the first quarter alone. Management sees an opportunity to expand from about 38,500 stores today to 55,000 by 2030. That's years of revenue growth just from new stores. Starbucks knows how to get new stores up and running and generating profitable revenue quickly. Its new plans are likely to bear fruit and lead to higher comparable sales growth and customer loyalty in the near future and beyond.
Starbucks is a star in maintaining a strong operating margin, the gold standard in operating efficiency. Its operating margin expanded by 1.4 percentage points to 15.8% in the first quarter. That's a key metric for investors to watch, and it's all the more impressive considering some of the pressure Starbucks is facing right now.
Is Starbucks a market underperformer?
Even though it's trailing the market's gains over the past year, Starbucks stock is more expensive than the S&P 500 average even though its price-to-earnings ratio stands at about half of its own five-year average.
SBUX PE Ratio data by YCharts
This higher valuation means that investors still see Starbucks as offering greater value than other companies in the S&P 500. Starbucks' dividend yield, at 2.44%, is much higher than the average S&P yield at 1.47%. It's also a fast-growing dividend, increasing more than 300% over the past 10 years.
In fact, it's somewhat misleading to view Starbucks as an underperformer since it has outperformed the broader market for most of its lifetime and is only recently trailing. That indicates it's experiencing near-term pressure and not internal problems.
In three years, Starbucks will have thousands more stores. Its comparable sales growth will probably be accelerated from today's levels, and it will almost definitely be paying a higher dividend. The big question is whether it will be beating the market again.
Only time will tell, but it has good chance. Even if it doesn't, shareholders will benefit from passive income and a probable stock gain over that period.
