Upside Left for SBUX Stock
Starbucks Corporation (NASDAQ:SBUX) stock was hammered last week after the coffee chain reported its fiscal second-quarter earnings. The company had record revenue, record operating margins, and record earnings. So what went wrong for investors to drive down SBUX stock?
Revenue came in just shy of analyst expectations and U.S. same-store sales growth guidance for the upcoming quarter was a bit less than analysts were expecting too. Those results, on top of the fact SBUX stock is up about 60% over the past two years, may have been the excuse investors needed to take some profit.
But the market just might be overreacting and this could be a good opportunity for investors to take a look at SBUX stock. Starbucks’ second-quarter results were solid and the company has several game-changer catalysts that could send the company to the next level. Here’s a look at three of them.
A couple of years ago, Starbucks began to improve its food offerings in an attempt to drive sales. More specifically, the company focused on breakfast sandwiches. So far, that bet is paying off.
Mornings were the fastest-growing part of the day in the latest quarter, increasing 13%. Starbucks attributed the adoption of the “Mobile Order and Pay” app feature, breakfast sandwiches, and espresso drinks for the increase. Sales of breakfast sandwiches alone increased 30%.
Starbucks has a great knack for knowing what customers want and what they wanted was breakfast to go along with their morning coffee. The next logical step may be to offer an all-day breakfast menu, like McDonald’s Corporation (NYSE:MCD) recently launched with much success.
The U.S. market may have hit a point of saturation, but Starbucks still has a lot of room to grow its presence internationally. But most of the focus, at least in the short-term, will be China.
China’s population consumes 4.5 billion cups of coffee a year, just a fraction of the 133.9 billion cups of coffee North Americans consume per year. (Source: “China’s Changing Tastes Offer Upside for Coffee,” The Wall Street Journal, September 16, 2016.) But in a nation of tea drinkers, China is starting to develop a taste for coffee and this will bode well for SBUX stock.
Starbucks says it’s opening about 10 coffee houses in China a week, with plans to grow its store count in the country from around 2,000 to 3,400 by 2019.
So far, it’s safe to say that Starbucks coffee shops in China have been a hit. In the latest quarter, Starbucks’ China revenues grew 18% and the number of transactions increased five percent.
China is massive and it represents a great growth opportunity for Starbucks over the next few years.
Starbucks changed its loyalty rewards program a few weeks ago, much to the chagrin of customers. Customers will now earn two “stars” for every dollar spent, rather than one star for each purchase.
Customers took to Twitter, complaining that the new system rewards customers who like to spend more rather than someone who just buys a single cup of coffee. Many analysts feared that the new system would deter sales or tarnish the loyalty program but that was not the case.
Starbucks’ loyalty rewards program added 900,000 new members in the fourth quarter, which is up from 16% from a year ago and eight percent from the previous quarter. The program now has about 12 million active users.
Starbucks has one of the best loyalty programs, if not the best, in the industry. It has become a major focus for the company to drive sales. And it’s for a good reason—Starbucks says that customers who pay with the mobile app spend three times more than customers who don’t. In the latest quarter, loyalty members even spent more than they did a year ago—22% more.
The Bottom Line on SBUX Stock
Starbucks has been one of the most successful growth stories over the past few decades, but the story isn’t over yet. With breakfast helping to drive sales, a focus on China, and the loyalty program growing at a rapid pace, SBUX stock should continue its upward trend.