Starbucks Corporation (NASDAQ:SBUX) hit an all-time high last Friday following its second-quarter earnings report. That news shouldn't come as a surprise to longtime investors and followers of the stock, however, as shares have been on a tear over the last six months.
In the quarter past, the coffee chain delivered comparable sales growth of 7% and has seen that key metric increase by 6% or more in each of the last five years.That's no small feat for a company that now has more than 22,000 stores worldwide.
During that time, the stock has jumped nearly 300%, and the gains are even more dramatic going back to the stock's bottom during the recession. Since fiscal 2009, adjusted earnings per share has more than tripled, showing that the stock appreciation is primarily due to earnings growth, and not price inflation.
With a P/E now over 30, it may be easy to assume that Starbucks' rally will soon subside, but there are several reasons the stock may just be hitting its stride. Let's grab a double shot for the road and take a closer look.
It's a great time to be an affordable luxury
The U.S. economy is stronger than it's been at any time since the recession. The unemployment rate is now below 6%, and gas prices are under $3, meaning Americans have more disposable income than they've had in at least seven years.
That's a great formula for success for a brand like Starbucks, which is selling affordable luxuries like $5 espresso drinks. Customers that might have cut back on Starbucks when times were tight are more likely to treat themselves these days. That was a big reason Starbucks was able to successfully lift prices on several items in the U.S., driving the comp increase.
Several other similar trends are providing a tailwind for the company. Soda consumption has been declining for a decade now, and diet soda in particular has fallen out of fashion. Of course, the need for beverages hasn't gone anywhere, but Americans who once counted on a Diet Coke for the workday caffeine fix might now be more likely to turn to a Starbucks drink.
Another surprising trend, and one representative of increasing discretionary income, is that Americans, for the first time ever, are spending more money at restaurants than on groceries. No restaurant chain has been growing sales faster than Starbucks. Millennials in particular favor spending their food budget outside the home, a trend that should favor Starbucks as that generation reaches their prime spending years.
China loves Starbucks
Nowhere has Starbucks' performance been stronger than in China. The coffee chain just posted 12% comparable sales growth in its China/Asia Pacific region, and it opened its 5,000th store in the area last quarter. Over the last five years, comparable sales grew by an average of 13% in the region,a sign that China is easily the company's ripest area for growth.
Starbucks has only about 1,500 stores in China currently, compared to over 11,000 in the U.S. With a fast-growing economy and over one billion customers, there should be room for thousands more locations in China, and Starbucks plans to double its store count in the world's most populous country to more than 3,000 by 2019.
The coffee company's success in the tea-loving nation owes to its brand strength and the relative novelty of the product it's selling. Much like the way the company helped introduce espresso drinks and gourmet coffee stateside, so it marketed coffee drinks to upwardly mobile Chinese consumers. The brand has become an important signifier of a modern Western lifestyle for the Chinese, and a product associated with conspicuous consumption, making it an aspirational brand and allowing it to charge premium prices.
Who knew coffee could be this high-tech
While Apple and Google are struggling to convert customers to mobile payments, Starbucks is making the transition look like a breeze. The company now processes about 16% of its transactions through its mobile app, and it's doubling down on that strategy, rolling out its new Mobile Order and Pay service, which allows customers to order remotely, then come in and pick up their drink without having to pay in the store. The company first tested the program in Portland, Oregon, and in March expanded it to the Pacific Northwest, a region encompassing more than 600 stores. A national rollout is expected later this year.
Similarly, the company will also to test a delivery service later this year, partnering with delivery app Postmates on a pilot program in Seattle, and offering in-house delivery service to customers in New York's Empire State Building. CEO Howard Schultz envisions the program evolving into customers being able to have a standing order delivered to their office each morning, for example.
That idea is still in the pipeline for now, but with Starbucks' mastery of technology and its reputation for service, it shouldn't be far away. The above suite of mobile-related services not only provides more value for Starbucks' customers, it enhances their relationship with the brand.
And that, along with the improving economy and promising prospects in China, is a good reason Starbucks investors can count on more caffeinated growth from the coffee connoisseur.