Coffee magnate Starbucks (NASDAQ:SBUX) landed a major win with its earnings report, causing the stock to rally. Starbucks posted $0.81 per share in earnings, which readily beat TipRanks projections calling for $0.75 per share. The company beat revenue projections as well, coming in at $8.41 billion against projections of $8.31 billion from Refinitiv.
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Starbucks posted record sales, reports noted, as global same-store sales were up 7%. Its United States segment alone saw sales surge 11% thanks to a combination of higher prices and small surges in traffic. Cold drinks led the way, accounting for roughly 75% of sales throughout the U.S.
It would be easy to wave this off as merely pumpkin spice mania kicking in, as it does so often this time of year. It would also be easy to brush this off as a fluke ahead of the likely economic troubles that are to come. However, Starbucks has a plan to fend off the downturn, and for that reason, I’m giving it the benefit of the doubt and staying bullish therein.
Is Starbucks Stock a Good Buy?
Turning to Wall Street, Starbucks has a Moderate Buy consensus rating. That’s based on 13 Buys and 10 Holds assigned in the past three months. The average Starbucks price target of $100.60 implies 9.7% upside potential. Analyst price targets range from a low of $91 per share to a high of $136 per share.
Currently, Starbucks enjoys quite a bit of support among investors. Starbucks has a ‘Perfect 10’ Smart Score rating on TipRanks. That’s the highest level the scale can offer. It also suggests a near-certainty that Starbucks will outperform the broader market, going forward.
Also, hedge funds bought 6.6 million shares collectively in the last three months. That turns their confidence level to “very positive.”
As of earlier today, Starbucks’ P/E ratio stood at about 26x. While that may be a bit higher than some investors will prefer, there are compelling numbers to consider all throughout the chain.
For instance, revenue at the chain has been climbing for the last six months. In March, revenue stood at $7.64 billion. In June, that jumped to $8.15 billion. Now, we stand at $8.41 billion. SBUX stated that its wage increases and investments in new equipment have been helping the company.
A Plan for the Future Never Hurts
Granted, considering the kind of macroeconomic environment we’re in right now—and are likely to continue deeper into for some time to come—the idea of buying expensive coffee drinks sounds like a terrible one. On the surface, that would be right enough. However, Starbucks has already accounted for this and has plans to take it on accordingly.
The biggest plan is to focus on those who are not only most likely to drink Starbucks but also those most likely to be able to afford it. Starbucks plans to focus on customized cold drinks sold through its rewards app, specifically targeting younger and wealthier customers.
The plan has some merit; after all, younger customers are more likely to have disposable income than their older counterparts. Said older counterparts are trying to keep food on the table for themselves and the kids, and that cuts into coffee drink sales pretty hard.
Starbucks is also pushing the holiday connections as hard as ever. Just yesterday, Starbucks started rolling out new lines of holiday drinks and holiday cups.
Several new baked goods—including the Snowman Cookie and the Reindeer Cake Pop—are also on tap.
Psychologically, this is a solid stroke. Starbucks is working to better associate itself with Christmas and the broader holiday season. That’s going to help drive traffic, even if overall traffic is reduced in the first place. A Wunderman Thompson study suggests that Black Friday spending will drop by as much as 50% thanks to the ongoing inflation troubles.
Starbucks couldn’t position itself much better than to be the place to relax and enjoy a hot drink in between shopping runs. The problem, of course, is that foot traffic to physical stores has been plummeting for years.
The start of the pandemic in 2020 only drove the problem home. Back then, Starbucks was paring worker hours in a bid to reflect the reduced traffic the coffee shops saw.
Conclusion: The Plan May be Good Enough
There’s reason enough to like Starbucks. The company is currently trading close to its lowest price targets, and there’s still a decent amount of upside potential to be had here. The company also has a clear plan to keep itself vital in the face of shaky macroeconomics. While there’s a risk that the plan will fail, the fact that the company has a plan at all here gives it some chance of success.
With signs that its labor troubles may be slowing down thanks to the rising union counts and regular refreshment of the product line to reflect the time of year, Starbucks is a proactive operation that’s making itself look fairly worthwhile.
There’s a risk of failure, of course, but the chances of at least modest success look strong. That’s why I’m bullish on Starbucks overall.
