Starbucks(NASDAQ:SBUX) has been an exceptional performer for its entire history as a public company. While I don't expect similar results going forward, I do think the company remains a buy and should outperform the overall market over the next 10 to 20 years. However, I would love to ask CEO Howard Schultz three questions to get an even better idea about the company's future direction.
1. What are the opportunities for future domestic growth?
Starbucks is definitely a global brand, but more than half of its 22,500 stores are in the United States. While the growth possibilities in China, India, Brazil, and other large markets are exciting, I would like to make sure that U.S. growth, both in terms of store count and same-store sales, is not put on the back burner.
Some domestic growth is being driven by an increase in the use of technology. Nearly every modern company is in some ways a tech company, and Starbucks has leveraged this shift better than most. The use of Starbucks' mobile app for ordering in U.S. company-operated retail stores has climbed from 8% of total transactions in the third quarter of 2013 to 20% in 2015. U.S. active members of its loyalty program have also increased sharply, from 6.4 million to 10.4 million over the same period.
Management hasn't rested on its laurels and has aggressively rolled out mobile order and pay to more than 7,400 company-owned U.S. stores. This should increase throughput, cut down on wait times during busy morning rush hours, and improve customer loyalty in a world full of local coffee choices.
In most major cities, a walk from one location to nearly any other will involve passing a handful of Starbucks stores. I wonder if this growth can continue in smaller cities and towns. Being the behemoth brings its own challenges as a wellspring of local competitors give consumers many more choices for "premium" coffee than they had 10 or 20 years ago. I think Starbucks can overcome the stigma of being the big corporate player in the market, and I'd like to hear how Schultz plans to keep his company nimble, fresh, and relevant to new generations of coffee drinkers in the United States.
2. Are night-time wine, beer, and food sales a good idea?
Schultz has a lot of built-in credibility when it comes to the company that he founded and later revitalized by returning to the job. Nevertheless, I am highly skeptical about the move to serve beer, wine, and food through a program called Starbucks Evenings. While there is a major opportunity to keep stores open later and sell high-margin alcoholic beverages, I wonder about what it will do to the culture of the company and the environment in its stores.
Selling alcohol brings a set of problems that don't exist when serving soft beverages. Loyal customers who want to have an evening coffee or tea may be driven away due to the different atmosphere. I'm also worried that the things people like about Starbucks for coffee and snacks -- speed and consistency -- will be detrimental for nighttime service. Bars and restaurants should, for the most part, be interesting local experiences. I'm going to give Starbucks the benefit of the doubt for now, and it does appear that the menus will vary by region, but I'm skeptical.
3. Does Starbucks need a revamped capital allocation plan?
It's impossible for a shareholder to complain about the returns that this company has delivered. Still, I wonder if Starbucks' management ought to make a few changes in how it allocates capital. The company has been in aggressive growth mode since its beginning days, and this has been both its advertising strategy and the main reason for its success. Growth led to near ubiquity, loyal customers, and happy shareholders. There is still a long growth runway ahead, and funds should be made available to capture these opportunities. Partnerships with local companies in Japan, Latin America, and India have lessened the burden on Starbucks to finance all of its expansion.
With the company's dividend yield only slightly above 1% and a payout ratio of 34%, I think the board ought to announce larger payout increases than it has in the past. Maybe the current path is the correct one, and more conservative dividend growth is prudent. I simply believe that a payout ratio of around 50% should allow Starbucks to easily fund expansion while giving current shareholders a bit more income in the meantime.
What to do next?
Asking questions I would pose to the CEO is a mental exercise that helps me flesh out potential problems or opportunities in the companies I invest in. It's hard to find fault in the job Schultz and his team have done, and I am always looking to opportunistically add to my position. If you don't have any Starbucks in your portfolio, I recommend researching the company further and considering a small starter position. I'm confident you'll like what you see, as this global growth story is far from over.