Starbucks Stock Analysis Report

With over 35,711 stores spread across the United States, Europe, Middle East, Asia Pacific, and Africa, Starbucks (NASDAQ:SBUX) is the undisputed industry leader with a market capitalization that exceeds $100 billion.

Here are 7 reasons to buy Starbucks stock:

Starbucks Valuation

Although Starbucks trades at a high price-to-earnings ratio of 28.9x, an analysis of the company’s cash flows reveals that further upside potential exists. 

When we ran the numbers, a discounted cash flow forecast analysis placed fair value of SBUX at $109 suggesting double digit percentage upside from current levels.

And trading at just over 3x last twelve months sales isn’t particularly elevated as multiples go. Perhaps even more compelling is that revenue growth has been accelerating.

Starbucks Dividend

For passive income investors, Starbucks dividend has been a consistent payer. For 13 consecutive years, the Board has approved dividend increases.

Currently, the dividend stands at 2.22%, which is a far distance from some of the highest paying dividend payers in the market. However, the key to owning a dividend stock is not just the dividend per se but they total return over time when factoring in both the share price and the dividends earned. Starbucks ranks well on this metric.

Starbucks Financials

Key financial metrics for Starbucks are extraordinary when compared to many other brick-and-mortar stores. For example, Starbucks ROIC is a whopping 17.7%.

The company is a steady top-line grower too. Only 2020 saw a dip in sales, and that was by just 11.3%. Over the past 5 years, however, revenues have been up year-over-year each year. 

And in the past two years, operating income has eclipsed $4.7 billion and $4.4 billion respectively. 

Starbucks Moat

1. Strong Brand: Starbucks has one of the most recognized and respected brands in the coffee industry. The Starbucks brand is associated with quality, consistency, and a unique coffee experience. This brand hurdle can make it challenging for new entrants to compete effectively.
2. Global Store Network: SBUX has a vast global presence with thousands of stores in various countries. Its widespread physical presence gives it a significant advantage in terms of market access and customer convenience. This network effect can deter competitors and make it difficult for them to match Starbucks’ scale quickly.
3. Product Diversification: Starbucks has expanded its menu beyond coffee to include a wide range of beverages (tea, frappuccinos, and so on) and food items. This diversification caters to a broader customer base and reduces its reliance solely on coffee sales.
4. Supply Chain and Sourcing: Starbucks invests heavily in sourcing high-quality coffee beans and has control over much of its supply chain. This ensures consistency in product quality, which is a crucial part of its brand image.
5. Innovation: Starbucks continually introduces new products, seasonal offerings, and store designs to stay relevant and attract customers. This adaptability and innovation are important in a highly competitive industry.

Loyal Customers

Like Coca Cola, which has seen off ambitious competitors over the years, Starbucks has built up a loyal customer base that won’t switch anytime soon.

With its extensive list of brands and varietal combinations, Starbucks simply cannot be displaced easily because customers have learned to love the taste.

If customers do migrate to Starbucks competitors, the change will come slowly. As a result, Starbucks financials are likely to remain stable and predictable for years to come.

Starbucks has a robust loyalty program, which includes its mobile app and rewards system. This program encourages repeat visits and customer retention. The data collected from the app also helps Starbucks tailor its offerings to customer preferences, further solidifying customer loyalty.

Loyal customers offer enormous benefits to Starbucks shareholders over the long-term, including:

Revenue Stability: Loyal customers are more likely to visit Starbucks regularly, often forming a routine of purchasing their coffee and other items there. This consistent stream of business provides a stable source of revenue. Even during economic downturns or when facing competitive pressures, a loyal customer base can help Starbucks maintain a baseline level of sales.

Increased Sales and Profitability: These types of buyers tend to spend more over time. They may not only purchase coffee but also buy food items, merchandise, and premium beverages, such as specialty coffees or seasonal offerings. This higher average transaction value contributes to increased sales and profitability for Starbucks.

Word-of-Mouth Marketing: Loyal customers are often enthusiastic advocates for a brand. They may recommend Starbucks to friends, family, and colleagues, effectively engaging in word-of-mouth marketing. Positive recommendations can bring in new customers, which can be a cost-effective way to grow the customer base.

Reduced Marketing Costs: Marketing and advertising to acquire new customers can be expensive. SBUX can reduce these costs by focusing on retaining existing customers. The company can allocate resources more efficiently by leveraging its loyalty program, targeted promotions, and personalized marketing to keep its loyal customers engaged.

Data Insights: Through its loyalty program and mobile app, Starbucks can collect valuable data on customer preferences and behavior. This data helps Starbucks understand its customers better and tailor its offerings to meet their needs. It can also inform product development and marketing strategies.

Resilience Against Competition: In a competitive market like the coffee industry, having a strong base of loyal customers provides a buffer against the competition. Even when new coffee shops or competitors enter the market, loyal Starbucks customers are less likely to switch to a competitor unless they are offered a significantly better value proposition.

Long-Term Growth: Loyal customers are more likely to stick with Starbucks as their needs and preferences evolve. This long-term customer retention can contribute to sustained growth and profitability over the years.

Supply Chain

Starbucks has one of the most impressive supply chain networks of any company. Each day it delivers coffee beans, milk, flavorings, and food to over 35,000 stores worldwide.

Even well-capitalized companies won’t be able to jump the high supply chain hurdle any time soon.

By investing in a robust supply chain, Starbucks possesses advantages less well-capitalized competitors can only dream about, including:

Consistency in Product Quality: The coffee chain places a strong emphasis on sourcing high-quality coffee beans from around the world. By having control over its supply chain, it can ensure consistent product quality across all its locations, which in turn provides a significant competitive advantage because customers can expect the same taste and quality in their coffee regardless of where they purchase it.

Cost Efficiency: The company’s global scale allows it to negotiate favorable contracts with suppliers and achieve economies of scale in its operations. This cost efficiency can be translated into competitive pricing, which attracts price-conscious customers and allows the coffee seller to maintain healthy profit margins.

Supply Chain Transparency: The company’s supply chain is transparent, with initiatives like the Coffee and Farmer Equity (C.A.F.E.) Practices program. This helps Starbucks to differentiate itself from competitors by demonstrating a commitment to responsible sourcing.

Innovation and Customization: Having a well-managed supply chain enables the firm to innovate and customize its product offerings. The company can introduce new coffee blends, seasonal drinks, and food items quickly, responding to changing consumer preferences. This agility in product development can give Starbucks an edge in a dynamic market.

Global Expansion: Starbucks’ supply chain capabilities have allowed it to expand rapidly into new markets around the world. The ability to efficiently set up and operate supply chains in different countries is a significant advantage. It allows SBUX to tap into new customer bases and capitalize on emerging market opportunities.

Reduced Risk of Supply Disruptions: By having a degree of control over its supply chain, Starbucks can mitigate the risk of supply disruptions due to factors like weather events or political instability in coffee-producing regions. This reliability in supply helps ensure that Starbucks can meet customer demand consistently.

Freshness and Customization: Starbucks places a strong emphasis on freshness, and its supply chain is designed to support this. Freshly roasted beans and ingredients are delivered regularly to stores, ensuring that customers receive a high-quality and fresh product. Additionally, the supply chain allows for customization, so customers can have their drinks made to order, meeting their specific preferences.

Revenue Opportunities

Starbucks simply needs to increase pricing on its drinks to boost revenues and profits. And you can bet that the cost of coffee will track inflation increases in coming decades.

Increasingly, Starbucks is getting into the big data game by moving its offline customer base online with a view to monetizing customers even better. Expect its online marketing campaigns to boost customer retention as Starbucks promos are rolled out.

Plus, the steady roll out of ever more store locations globally will continue to increase revenues and profits in coming years.

Beyond the obvious ones, Starbucks also has a plethora of opportunities to grow revenues, such as:

Menu Innovation: It can introduce new and innovative menu items, including beverages, food, and snacks, to attract and retain customers. Seasonal and limited-time offerings often generate excitement and drive sales.

Digital Transformation: Starbucks can leverage its digital platform, including its mobile app and loyalty program, to enhance the customer experience and drive sales. This can include mobile ordering, delivery services, and personalized marketing.

At-Home Coffee Products: The coffee distributor can expand its line of consumer-packaged goods (CPG), such as coffee beans, ground coffee, and ready-to-drink beverages, for sale in grocery stores and online. This extends the Starbucks brand beyond its coffee shops.

Partnerships and Collaborations: Collaborations with other brands or companies can open up new revenue streams. For example, partnerships with food delivery services or co-branded products with popular consumer brands.

Health and Wellness Products: Offering healthier food and beverage options, such as low-calorie drinks and organic snacks, can appeal to health-conscious consumers.

Sustainability Initiatives: As consumers increasingly prioritize sustainability, Starbucks can invest in environmentally friendly practices, such as reducing waste, sourcing sustainable ingredients, and promoting reusable products.

Franchise Opportunities: Expanding franchise operations can allow it to enter new markets more rapidly and with lower capital investment.

Subscription Services: SBUX could explore subscription-based models, such as coffee subscriptions, where customers receive regular deliveries of their favorite Starbucks products.

Digital Payments and Fintech: It can further develop its mobile payment system and potentially expand into fintech services, capitalizing on the financial transactions that occur through its app.

Beverage Alcohol: Some locations have experimented with offering alcoholic beverages during the evening hours. Expanding this concept or offering specialty alcoholic beverages could be an option in some markets.

Alternative Store Formats: Management can experiment with alternative store formats, such as drive-thru-only locations, pickup-only stores, or smaller urban stores tailored to specific customer needs.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.