Starbucks Stock Down 35% in 2022, Is There an Upside?

[Note: Starbucks
SBUX
’ fiscal year 2021 ended October 3, 2021]

After a 35% decline over the past six months, at the current price of approximately $75 per share, we believe Starbucks Stock (NASDAQ
NDAQ
:SBUX), the world’s leading specialty coffee roaster, marketer and retailer, may see more gains. SBUX stock has fallen from around $114 to $75 in the past six months, significantly underperforming broader indices, with the S&P falling around 20% over the same period. The decline in SBUX shares can be attributed to investor concerns about rising commodity costs and their effect on the company’s bottom line. Starbucks’ strong presence in China has also not helped matters due to the strict lockdown which has slowed business. That said, the coffee business is lucrative because it lends itself to repeat purchases, which puts Starbucks in a strong position. The premium coffee products offered by Starbucks involve no significant technological disruption, and the industry’s slow progress should help Starbucks survive in the long run. In light of this year’s market decline, the shares are currently trading at a compelling price-earnings ratio of just 20. We believe the coffee company’s stock could post gains based on the fact that it continues to grow in the United States and has growth potential in China and beyond.

Starbucks posted a 15% year-over-year (year-over-year) sales increase, with U.S. same-store sales growing 12% in the second quarter of the fiscal year (ended April 3 ). This is an incredible gain for an established company, especially in a quarter where the consumer faced considerable headwinds due to inflation. Overall, the company reported global same-store sales growth of 7%, which is again impressive given weak results in China – where same-store sales were down 23% over the of the second trimester. It should be noted that the company was still able to add 97 new sites in China despite the difficult environment. And, as China reopens and returns to normal life with the end of lockdowns in Shanghai and other major cities, the company plans to boost sales there through its digital outlets.

In the highly competitive restaurant industry, how does Starbucks stand out?

  • Starbucks’ previous investments in delivery, mobile apps, beverage innovation and its membership program have generated loyalty. Mobile orders and payments grew 20% year-over-year (year-over-year) in the second quarter of the fiscal year, and delivery activity increased 30%.
  • Overall, 66% of Starbucks’ total revenue comes from the US market, where it has 15,544 locations. Going forward, the company plans to direct its capital investments toward accelerating store growth, with plans for 90% of new locations to be drive-thru. The intention here is to increase profitability as well as reduce overhead typically associated with traditional restaurants.
  • Starbucks currently has 34,630 stores worldwide, but management believes there are still plenty of opportunities to expand the company’s retail footprint. The company plans to have 55,000 Starbucks locations in 100 different markets by 2030 – with 75% of that expansion outside of the US market.
  • Starbucks reported 26.7 million 90-day active members in the United States as of April 3, a year-over-year increase of 17%. Through its loyalty program, these customers accounted for 54% of company-owned store sales in the United States in the second quarter.
  • Consumers are willing to pay for products they deem premium, based on Starbucks gross margin of 28% over the past 12 months. This high margin gives the business the opportunity to absorb higher input costs while remaining profitable. Starbucks has historically been able to raise prices without adversely affecting demand in the inflationary environment in the United States, which demonstrates the strength of its business.
  • The pandemic has resulted in consumers showing less enthusiasm for sitting down and enjoying hot beverages, and more interest in craft cold beverages on the go. Thus, cold drinks now represent almost 80% of the company’s activity. As new interest in cold beverages puts pressure on customers and colleagues, the company is looking to improve store design, technology, equipment, employee payments and beverage selection to meet this request. These improvements should improve the customer experience and increase profitability.

We updated our model after the release of Q2. We plan Starbucks revenue to $32.9 billion in fiscal 2022, up 13% year-over-year. With respect to net income, we now expect earnings per share to be $3.00. Given changes to our revenue and EPS guidance, we have revised our Starbucks Rating at $86 per share, based on expected EPS of $3.00 and a P/E multiple of 28.6x for fiscal year 2022, nearly 13% above the current market price . That said, the company’s shares look cheap at the current price.

In its latest earnings call, Starbucks suspended its sales guidance due to lockdowns in China. Going forward, if current inflationary pressures continue to persist, broader markets are likely to see lower levels in the near term. And, a further decline in SBUX stock can be used as a buying opportunity for better long-term gains.

As SBUX stock looks poised for more gains going forward, it’s worth seeing how its peers stack up. Find out how Starbucks peers price on the measures that matter. You can find other useful comparisons for companies in all industries on Peer Comparisons.

With inflation rising and the Fed raising interest rates, Starbucks has fallen 35% this year. Can it fall more? See how low Starbucks stock can go by comparing its drop in past stock market crashes. Here is a summary of how all stocks performed during previous stock market crashes.

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