Starbucks Corporation: Why SBUX Stock is Set to Rebound

SBUX Stock Financial PerformanceStarbucks Corporation (NASDAQ:SBUX) stock was hammered this year due to investors’ concerns regarding its recent sales performance. SBUX stock lost 11% of its value year-to-date. SBUX stock went down from its highest trading price of $61.79 per share in February to around $53.40 per share on October 6.

Investors are wondering: is it time to bail or buy SBUX stock? Should investors consider investing now to take advantage of the current discount on Starbucks stock?

SBUX Stock Financial Performance

In the third quarter, Starbucks stock reported adjusted earnings of $0.49 per share and revenue of $5.24 billion, an increase of seven percent and 17% year-over-year, respectively. According to the company, its global comparable store sales climbed four percent. (Source: “Starbucks Reports Record Q3 Financial and Operating Results,” Starbucks Corporation, July 21, 2016.)

Starbucks stock is performing well, based on the figures. However, some investors seemed unsatisfied with its sales performance, which was marginally lower than the consensus estimate.

Advertisement

Wall Street analysts expected the company to deliver $5.33 billion in revenue in the third quarter. The company’s $4.99 billion revenue in the second quarter was also slightly below the expectation of $5.03 billion. Starbucks management explained that the company experienced temporary headwinds, but remained optimistic regarding its long-term profitable growth.

If you look at Starbucks stock’s  historical annual earnings and sales performances, you will notice that the company’s growth rate was impressive.  Its annual earnings growth was more than 20%, and the revenue growth rate was over 13% from 2012 to 2015. The company is expected to continue this trend.

Starbucks Rewards Program to Drive Sales

One of the factors that affected the company’s sales performance was the change implemented on the “Starbucks Rewards” program. Customers complained based on their perception that they have to spend more on Starbucks to get the same number of rewards in order to get a free item. (Source: “Customers Are Furious With Starbucks’ New Rewards Program,” Fortune, February 23, 2016.)

During the company’s third-quarter earnings call, Starbucks CEO Howard Shultz said shifting the loyalty program from a frequency-based to a spend-based model is among the boldest and most strategic moves of the company.

Shultz explained that the spend-based model would best reward the most loyal customers of Starbucks, and would encourage them to visit its stores more often and buy products.

He reported that the Starbucks Rewards program added almost two million new members, an 18% growth year-over-year. In the third quarter alone, it added 300,000 new members. The company has 12.3 million active Starbucks Rewards members in the United States and millions more around the world, as of the end of 3Q.

The company noted that the established pattern of revenue growth from Starbucks Rewards customers surpassing the revenue growth from non-members is continuing. The company also observed an incremental increase in spending and total profit per customer, directly linked to customers having joined the Starbucks Rewards program.

The company believes the Starbucks Rewards program could fuel its comparable sales growth as it plans to launch more initiatives to attract more customers and strengthen their loyalty to the brand.

Starbucks Stock Always Rebounds with Greater Strength

Starbucks demonstrated that its business and brand is relevant and resilient not just in the United States, but in different countries globally. The company is opening 1,900 net new stores globally, including more than 600 in the United States alone this year. It plans to boost the pace of its store openings in 2017 and the years ahead.

It is expanding every day in China, with nearly 2,300 stores in over 100 cities in the country.  The company is opening two new “Starbucks Roastery” locations: one in Shanghai in 2017 and another in New York in 2018.

Starbucks is also extending its footprint for its consumer packaged goods (CPG) globally through partnerships. It started shipping its ready-to-drink products in Latin America in collaboration with PepsiCo, Inc. (NYSE: PEP). Starbucks also signed an agreement with Anheuser-Busch Inbev SA (ADR) (NYSE: BUD) to offer “Teavana” ready-to-drink premium flavor options to consumers across the United States.

The company is also on track to launch ready-to-drink products in China by the end of 2016 through its partnership with Tingyi (Cayman Islands) Holding Corp, and it is on schedule to launch its Starbucks “Nespresso”-compatible capsules in France and the United Kingdom this fall.

Schultz emphasized that even though Starbucks occasionally experiences periods of slow growth, its business rebounds with greater strength and vigor in the following quarter. He believes that the pattern will continue next year and beyond.

The Bottom Line for SBUX Stock

Starbucks is the world’s largest roaster, marketer, and retailer of specialty coffee. The company has proven its ability to deliver robust financial results consistently, and the trends showed that it would continue to do so.

Take note that the company is successful in transitioning its customers to the new Starbucks Rewards program. It is now well positioned to accelerate growth and profitability over the long term.

The downward trajectory of SBUX stock is just temporary, and it is expected to surge even greater over the next quarters. Wall Street analysts forecasted that Starbucks stock could trade as much as $72.00 per share, an upside of 34.5% over the next 12 months. Their median price target for SBUX stock is $66.00 per share, an increase of more than 23%.