Outlook for Starbucks as Economy Reopens
Stock Analysis & Ideas

Outlook for Starbucks as Economy Reopens

Leading roaster and retailer of specialty coffee, Starbucks Corporation (SBUX), reported solid fiscal third-quarter results last July, and is expected to report fourth-quarter results on October 22.

As the global economy reopens, Starbucks seems to be in a good position to deliver strong earnings growth as a result of the changes the company has introduced over the last 18 months.

I am bullish on Starbucks. (See SBUX stock charts on TipRanks)

Earnings Recap

In the Americas, Starbucks reported a significant recovery of revenue in comparison to the corresponding quarter last year, clocking in year-over-year comparable store sales growth of 83%.

Operating margins expanded to 24.4% from a negative 14.4% last year as well, driven by the absence of COVID-19 related costs, business and pricing recovery, temporary government subsidies, and the benefits of store transformation.

The company opened 1,175 net new stores in the last 12 months, and a 10% favorable impact from foreign currency translations contributed to strong international net revenue growth.

Expanding Through Partnerships, Innovation

The company expects to open 1,100 new Starbucks stores worldwide in Fiscal 2021.

The Global Coffee Alliance, the partnership between Starbucks and Nestle (NSRGY), provides the latter perpetual rights to market Starbucks products globally outside its coffee shops, and this partnership has helped Starbucks expand its global reach in terms of new geographies, and new channels.

This partnership covers many products and brands, such as Nespresso, Seattle’s Best Coffee, Teavana, Torrefazione Italia, and more.

This alliance has helped Starbucks become a popular brand in under-penetrated regions such as Asia, and was instrumental in helping Starbucks end the last fiscal year as the No. 1 coffee brand in the world.

Ready-to-drink Starbucks products that are not covered by the above alliance witnessed double-digit growth in EMEA and China in the last quarter, whereas the North American coffee partnership with PepsiCo, Inc. (PEP) led to a 19% growth in consumption.

These numbers suggest that Starbucks is executing its partnership strategy over and beyond expectations to drive revenue and earnings growth, which will be a catalyst for growth in the post-pandemic era as well.

Starbucks is continuing to innovate in fast-growing categories such as Cold Brew, Draft Nitro beverages, and plant-based modifiers such as almond, coconut, and soymilk alternatives.

The company’s Reserve Roastery in Seattle is another splendid innovation, where customers can experience a working roastery connected to a café.

Starbucks also collaborated with Beyond Meat last year to rollout a plant-based menu available at more than 3,300 Starbucks locations in China, taking advantage of the growing popularity of plant-based products. The company is on the verge of introducing plant-based sandwiches in Canada as well.

In China, Starbucks now has more than 5,100 stores, and is planning to hit 6,000 stores by the end of the year. In the most recent quarter, the company launched its flagship store on JD.com (JD) as well, which is one of the most popular e-commerce platforms in mainland China.

Wall Street’s Take

Based on the ratings of 17 analysts offering 12-month price targets, Starbucks stock comes in as a Moderate Buy. The average SBUX price target of $132.14 implies 16.3% upside from the current market price.

Bottom Line

Starbucks is continuing to expand its presence in global markets through partnerships, and the company maintains an unwavering focus on upgrading its menu as well.

Both these initiatives are likely to help Starbucks report a strong uptick in revenue once mobility restrictions are fully lifted in every corner of the world. The post-pandemic era looks promising for Starbucks, and its stock price is likely to follow earnings in the long run.

At the time of publication, Dilantha De Silva did not have a position in any of the securities mentioned in this article.

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