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Starbucks’ (SBUX) Initiatives Impress, Macro Woes Remain

Zacks

On Nov 22, we issued an updated research report on coffee chain giant Starbucks Corporation SBUX.

Starbucks’ shares have lost approximately 1.2% year to date due to several macro issues. Although the stock has partially recovered, it lags the broader market.

Pros

Starbucks is one of the most recognized coffee brands in the world. From espresso to specialty roast and ground coffee to premium single-serve market, Starbucks enjoys a leading position in all coffee segments. It is the number one premium packaged coffee brand in America. Further, management focuses on increasing its global market share through store openings in new and existing markets, remodeling of existing stores, deploying technology, controlling costs and aggressive product innovation and brand building.

Recently, Starbucks concluded fiscal 2016 on a solid note. The company reported better-than-expected results in the fourth quarter with earnings and revenues increasing 30.2% and 16% year over year, respectively, buoyed by strong sales and margin expansion (up 180 basis points or bps). Higher sales in the U.S. and China/Asia Pacific division have counterbalanced a slowdown in the Europe, Middle East, and Africa (“EMEA”) segment.

Starbucks is working on technological innovation to strengthen its brand, improve efficiency and in-store execution and boost profits. Its Mobile Order & Pay service now represents nearly 6% of the total U.S. transactions as of Oct 2, 2016, up from 5% in the prior quarter.

The Mobile Order & Pay service allows customers to order before arriving at a Starbucks café and pick up the items at the store, thus saving on time. The service is witnessing increased usage and could prove to be a key growth driver going ahead. Starbucks has also deployed the facility in many of its stores in the U.K. and Canada with plans to continue rolling out the platform in key international markets.

Again, Starbucks’ Channel Development or CPG business has become a fast growing and highly profitable business. This segment’s operating margin rose 390 bps in the fourth quarter of fiscal 2016.

Cons

Economic, geopolitical and consumer headwinds continue to impact Starbucks’ results. Meanwhile, the company’s EMEA segment has been experiencing sluggish performance. During the fourth quarter, Starbucks posted negative 1% comp growth in the EMEA region and a 12% decline in revenues due to the ongoing macro and consumer challenges, and a shift toward more licensed stores along with currency headwinds. Comparable store sales or comps were flat in fiscal 2016 versus 4% growth in fiscal 2015.

In Europe, economic/political conditions are anticipated to be challenging after U.K.’s exit from the 28-member economic bloc. As it is, business in Europe is clouded by the economic uncertainties in the Northern region and deflation in the Eurozone.

High inflation rates and currency devaluation are hurting sales in Latin America, especially Brazil and Argentina. Moreover, the slowing down of the Chinese economy and concerns about Japan, owing to a weaker yen and tax increases, are adding to the restaurateurs’ woes.

Zacks Rank & Key Picks

Starbucks carries a Zacks Rank #3 (Hold). Better-ranked stocks in the restaurant space include The Cheesecake Factory Incorporated CAKE, Darden Restaurants, Inc. DRI and McDonald's Corporation MCD.

All three companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Darden Restaurants’ current year growth rate is pegged at 10.9% while that for Cheesecake Factory is 19.5% and McDonald’s is 14%.

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