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Starbucks (SBUX) Banks on Solid Global Footprint for Growth

Zacks

Starbucks Corporation SBUX is riding high on impressive performance in fourth-quarter fiscal 2018. Results were primarily driven by robust Americas and U.S. comparable store sales. Starbucks’ largest market, the United States, reported comps growth of 4%, marking the strongest gain in the past five quarters.

Additionally, the company’s operating fundamentals such as solid global footprint, successful innovations, best-in-class loyalty program and digital offerings are encouraging. Let’s delve deeper.

Factors Driving Growth

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 commands authority and a leading position in all coffee segments. Further, management focuses on increasing its global market share by judiciously opening stores in new and existing markets, remodeling existing stores, deploying technology, controlling costs and aggressive product innovation and brand building.


In fiscal 2018, Starbucks added 2,300 net new stores (excluding Teavana closures), marking an increase from roughly 2,250 net new locations last year. In fiscal 2019, the company plans to add 2,100 net new stores.

Moreover, new store productivity and Return on Investment (ROI) in the United States and China are at all-time highs. Therefore, the company will focus on growth over there, with roughly two-thirds of new units to open across these markets including 600 in the Americas and 600 in China (out of 1,100 total new locations in China/Asia-Pacific). By fiscal 2021, the company intends to open approximately 12,000 stores globally, reaching the total store count to an estimated 37,000.

In the past two years, management has successfully turned around its EMEA business by improving customer experience through innovative new store designs, up-leveling product offerings and expanding margins via process and supply chain efficiencies. Additionally, the Starbucks brand is gaining popularity with consumers across Asia as the company is increasingly investing in the Asian markets.

In China, Starbucks' business is rapidly growing owing to innovative store designs, local product innovations and the success of MSR program. It has plans to launch certain features in China loyalty program this year and full-digital capabilities over time. Over the next five years, this Seattle-based coffee giant has plans to build 600 net new stores annually in Mainland China. Notably, this will double the market's store count from the end of fiscal 2017 to 6,000 across 230 cities. This speedy expansion in China is likely to triple its revenues and double its operating profit by the end of fiscal 2022 from fiscal 2017 level.

Concerns

Starbucks, which shares space with YUM! Brands, Inc. YUM, McDonald's Corporation MCD and Dunkin' Brands Group, Inc. DNKN has been witnessing margin contraction over the past few quarters. In the first, second, third and fourth quarter of fiscal 2018, Starbucks non-GAAP operating margin shriveled 170, 80, 230 and 190 bps, respectively. The decline in the recently reported quarter can be primarily attributed to an impact of investments associated with the U.S. tax law change, product mix shift largely toward food and planned partner. Rise in costs due to investment in digitalization and unfavorable impact of 40 bps associated to the Nestlé transaction also dented the company’s operating margin. Higher spending in its store partners (employees) along with the impact of its ownership change in the East China business added to the woes. Margin is expected to decline in fiscal 2019 as well.

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