COMPANY PROFILE

Since 1971, Starbucks Coffee Company has been committed to ethically sourcing and roasting high-quality arabica coffee. Today, with more than 30,000 stores around the globe, the company is the premier roaster and retailer of specialty coffee in the world. Through our unwavering commitment to excellence and our guiding principles, we bring the unique Starbucks Experience to life for every customer through every cup. To share in the experience, please visit us in our stores or online at stories.starbucks.com or www.starbucks.com.

Recent Earnings

• Global comparable store sales up 5%, driven by a 3% increase in average ticket and a 2% increase in comparable transactions

• Americas and U.S. comparable store sales up 6%

• International comparable store sales up 3%

• China comparable store sales increased 5% highlighting all geographies had pricing power.

• The company opened 630 net new stores in Q4, yielding 31,256 stores

• Consolidated net revenues of $6.7 billion grew 7% over the prior year

• GAAP operating margin expanded 90 basis points year-over-year to 16.1%

• GAAP Earnings Per Share of $0.67, up 20%

• Returned $2.7 billion to shareholders through a combination of share repurchases and dividends

• Starbucks® Rewards loyalty program grew to 17.6 million active members in the U.S., up 15% year-over-year

Fiscal 2020 Guidance

The company introduces the following fiscal year 2020 guidance (all growth targets are relative to fiscal year 2019 non-GAAP measures unless specified):

• Global comparable store sales growth of 3% to 4%

• Approximately 2,000 net new Starbucks stores globally

  • Americas approximately 600 net new stores (3% to 4% growth in the U.S.)

  • International approximately 1,400 net new stores (mid-teens growth in China)

• Consolidated GAAP revenue growth of 6% to 8%

• Consolidated operating income growth of 8% to 10%

• Consolidated operating margin improving modestly

• GAAP interest expense of approximately $415 to $425 million

• GAAP and non-GAAP effective tax rate in the range of 22% to 24%

• GAAP EPS in the range of $2.84 to $2.89

  • Non-GAAP EPS in the range of $3.00 to $3.05

• Capital expenditures of approximately $1.8 billion

Opinion

From a factor scoring perspective versus the other 199 brands in the brands index, here’s where Starbucks scores well as of 9/17/19:

• 88% high Free cash flow yield - a solid value metric

• 99% high free cash flow growth

• 81% strong price momentum

• 97% high 3YR ROE

• 93% high 3YR projected dividend growth

• 85% high free cash flow

• 96% high ROIC

• 97% high ROIC over WACC (weighted average cost of capital)

• 79% high cash balance over total market cap

The stock has pulled back about 15% from the highs on a recent reduction of guidance by management but this quarter and the guidance should put fears to rest. This is a steady, cash flow generating and dividend growth stock with super high brand loyalty and global brand recognition and relevancy. It’s a solid hold and a buy on dips. There’s not much I can say other than the haters will continue to say SBUX is too expensive and my retort is the premium is warranted given the stability of the business and intangible value of the Starbucks brand. Right now, sentiment is pretty bad surrounding the restaurant sector, what a difference a few months makes. Labor costs, input costs will continue to be a potential headwind but Starbucks has some pricing power and high brand love in its favor and lets face it, coffee is addicting, I don’t even drink it but I see how people act when they haven’t had their coffee, thats a story I want to be involved in. And it’s wrapped inside a corporate umbrella that is working hard at showing the world how important doing well by doing right is.

Starbucks the stock has been a complete monster since going public. I’m not sure even Starbucks could have seen the potential growth they would ultimately have. An investment in Starbucks now is a very different proposition however. Yes, they will keep opening new stores around the world and upgrade existing stores but an investment in SBUX now is about stable, predictable growth and the massive cash flow generation coming from >30,000 stores. Just think about that for a moment, 30,000 stores generating cash that gets filtered into additional innovative store concepts, dividends, share buybacks and growth of the dividend. Not a bad story for an aging demographic that wants and needs growth of income and where bond income is much less than it’s been in 30 years. The real story for Starbucks continues to be the China expansion. They now have ~4000 stores in China with ore opening every day. The average consumption of coffee from a Chinese consumer is a fraction of what it is in the U.S. so there’s plenty of room for expansion if the culture begins to adopt coffee on a more broad basis. The Chinese love their tea’s though and Starbucks is building stores that blend into the community and offer a gathering place.

The stock broke out of a massive base and has gone straight up so it needs a rest and with the recent lowering of guidance by management. I suspect the stock will stall for a bit. All of these are good data points given how overbought the stock was so I’m happy to add to the position on any deeper pullbacks because this great brand will be a go-to for investors looking for stability for many years to come.