Essential Details About Starbucks Prior to Purchasing Shares:
Starbucks (SBUX 0.11%) reigns supreme in the retail coffee sector, boasting a vast network of stores and worldwide presence. Since its debut on the stock market in 1992, the company has often been a lucrative investment option. However, things have taken a turn for the worse lately, with shares delivering a negative 8% return over the past 3 years.
Contemplating investing in Starbucks might be on your mind. Here are three crucial facts about this leading food service stock that investors must consider before making a purchase.
1. Decreasing sales revenues
Anyone keeping an eye on this company will notice that Starbucks is in a rough patch. The company has reported a series of three consecutive quarters with decreasing year-over-year revenues. This downward trend can be attributed to declining same-store sales (comps), with the most recent quarter - Q4 2024, ending September 29 - reporting a 7% drop globally.
What's particularly concerning is the decrease in foot traffic at Starbucks' stores. This fell by 10% in the U.S. during Q4, and in China, traditionally its primary growth market, traffic decreased by 6%. These aren't positive indicators.
Brian Niccol, the former CEO of Chipotle Mexican Grill, was appointed to help improve the situation. Niccol's objectives include streamlining the menu and enhancing service speed. Given his success at the Tex-Mex quick-service chain, particularly following its health issues over numerous years, there could be no better individual to facilitate a successful turnaround at Starbucks.
2. Durable competitive advantage
Despite its challenges, Starbucks possesses a durable competitive edge that underpins its business strength. In this instance, the company's brand power has historically played a significant role in its success. This brand recognition is crucial in resonating with consumers worldwide.
Starbucks has positioned itself as a premium brand, which allows it to sell what are essentially commoditized drinks and food at higher prices. Over the past decade, the company's gross margin has averaged 28.2%, demonstrating the profitability of these items.
While it's fair to argue that the brand has weakened somewhat in the past couple of years, as shown by the falling comps mentioned above, zooming out reveals a steady climb in comps over the years. Furthermore, the fact that the company has successfully expanded into new markets, imitating its U.S. strategy, suggests that its brand continues to hold value.
That enduring strength and global appeal give me confidence that Starbucks will continue to dominate the retail coffee industry for decades to come.
3. Increasing the number of stores
As of September 29, Starbucks operated a total of 40,199 stores globally, an increase of 29% compared to just five years ago. On revealing a strategic plan in November 2023, management set a clear target of reaching 55,000 locations worldwide by 2030. This ambitious goal would significantly boost revenue and earnings growth.
Due to the leadership change and ongoing struggles, expanding the store count isn't management's foremost priority at this moment. As chief financial officer Rachel Ruggeri stated on the Q4 2024 earnings call, "We plan to reduce the number of our new stores and renovations in fiscal year 2025."
However, I believe that the initial target of 55,000 stores is still on the table once the business stabilizes and Starbucks can shift its focus to expansion once more. This means there is still considerable potential for growth both in the U.S. and abroad, particularly in China.
The prospect of higher sales and profits in the future can be an attractive proposition for patient investors considering adding this stock to their portfolios.
Considering Starbucks' ambitious expansion plan, aiming to operate 55,000 stores globally by 2030, it presents an intriguing opportunity for patient investors looking to invest in the company's future growth. Despite current challenges, Starbucks' strong financial management and durable competitive advantage, rooted in its globally recognized brand and premium product pricing, could continue to drive returns for investors who are placing their trust in the company's long-term potential in the finance sector, particularly in the retail coffee industry.
With a strategic focus on revitalizing its menu and improving service speed under the leadership of former Chipotle Mexican Grill CEO Brian Niccol, Starbucks may be able to turn the tide to positive sales revenues in the coming quarters, making it an appealing option for those interested in investing in the finance and retail coffee sectors.
