Is Starbucks’ (NASDAQ:SBUX) Growth Strategy Worth Buying Into? | Stock Market News

Starbucks (NASDAQ: SBUXrecently posted its Q4 results, ending fiscal 2022 on a high note. More importantly, the company has outlined an optimistic medium-term growth roadmap, which has set the stage for record results in Fiscal Year 2023. That said, I remain cautious about the stock’s elevated valuation levels, which leave little to no margin of safety for investors. Accordingly, I am neutral on the stock.

Fiscal 2023 Has Begun with Robust Growth Momentum for Starbucks

Following exceptional results last year and management’s optimistic outlook, it appears that Starbucks has stepped into fiscal 2023 with robust growth momentum. Specifically, in fiscal Q4 results, Starbucks posted year-over-year revenue growth of 3.2% to a quarterly record of $8.41 billion. This may appear like a soft growth number, but there are three points to note here.

Firstly, fiscal Q3 was also another record quarter for the company, indicating further sequential improvements. Secondly, with inflation raging and mortgages on the rise, consumers’ purchasing power is supposed to be on the decline, which in turn should mean declining revenues for a premium coffee brand such as Starbucks. Thus, any growth is actually quite remarkable. Finally, due to Starbucks’ strong international footprint, the company’s sales were impacted by a strong dollar. In constant currency, revenue growth would have actually been even stronger.

In North America, where Starbucks’ performance is not impacted by FX headwinds, comparable store sales increased by 11%. The increase was driven by an 8% increase in average ticket and a 1% growth in comparable transactions. What stood out to me was that Starbucks’ average ticket reached a new all-time high once again, with its expansion backed by increased spending on food and the recently implemented strategic pricing actions.

I was personally expecting strong food sales growth, but certainly not as high as 18%, which, again, speaks volumes about Starbucks’ brand and management’s execution in diversifying cash flows. In my view, food is going to remain a strong growth catalyst for Starbucks because the pricing of coffee already seems to have arrived at a glass ceiling. Therefore, seeing Starbucks’ new food offerings being well received by customers is another cheerful point.

Promising Developments in China

As I mentioned, the company’s international revenues were negatively affected by a stronger dollar. That said, the key metrics related to international sales were quite strong, especially in China, which has become an increasingly important region for Starbucks’ growth prospects.

For context, active Starbucks rewards membership in China rose 29% quarter-over-quarter to over 17 million members, while delivery sales, which are higher-margin and should boost profitability, grew 35% year-over-year, now representing more than 24% of sales. These numbers become even more special when we consider that the Chinese market is still being impacted by the Chinese government’s strict Zero COVID policy.

Is Starbucks’ Profitability Worsening?

Starbucks’ revenue growth and overall sales metrics were quite decisive. However, inflationary forces did offset the growth in revenues. Specifically, Starbucks’ operating margin contracted 250 basis points to 14.3%, mainly due to higher labor expenses, including improved store partner wages.

Amid lower margins, Starbucks’ bottom line was also compressed, resulting in adjusted earnings per share coming in at $0.81, down from $0.99 last year. Thus, adjusted earnings per share for the full year landed at $2.96 compared to last year’s $3.20.

Nevertheless, I believe that profitability remained largely robust. Fiscal Year 2022’s adjusted earnings per share indicate a decline of just around 10%, despite multiple headwinds negatively affecting the company. Should the macroeconomic environment improve, we should see Starbucks’ profit margins expand quite significantly, given its performance under such pressures.

Is SBUX Stock a Buy or Sell, According to Analysts?

Turning to Wall Street, Starbucks has a Moderate Buy consensus rating based on 13 Buys and 10 Holds assigned in the past three months. At $100.35, the average Starbucks stock forecast implies 0.83% upside potential over the next 12 months.

Takeaway: SBUX Stock Provides No Margin of Safety for Investors

Based on Starbucks’ growth estimates, analysts expect EPS to rebound by nearly 15% this year to $3.40. However, this implies a forward P/E of about 29x, which is quite a hefty valuation multiple in the current market environment. On the other hand, Starbucks is expected to keep growing its earnings per share by double-digits in the coming years, which sort of justifies a premium. Nevertheless, investors have little to no margin of safety if the current macroeconomic headwinds persist, which is why I am taking a pass on the stock at its current price.


Leave a Comment