How High Can Starbucks Fly? It All Hinges on One Metric
Who says megarestaurant chains can't be high-octane growth companies? Starbucks (NASDAQ: SBUX) has rocketed 46% higher in the last year as the world's third-largest restaurant chain by number of locations has reignited existing store sales growth. Despite the surge in stock price, though, the coffee shop and retailer can keep climbing if it can demonstrate that its recent momentum in comps is more than just fleeting.
What's the deal with comps?
Comparable-store sales is a combination of the number of transactions (foot traffic) and ticket size per order at existing stores -- in Starbucks' case, stores that have been open for at least 13 months. For a company with over 30,000 locations worldwide, rising comps is one of the primary ways Starbucks can increase profitable sales.
Comps were touch-and-go in 2018. Though the metric ended the year up 2%, there were quarterly declines at times -- especially in the important growth region of China and greater Asia. The annual rate was a deceleration from years past. As early as 2016, Starbucks was still putting up 6% global comps growth.
For fiscal 2019 to date, though, Starbucks has had a resurgence in comps -- up 4% in the second quarter and 3% in the first. Leading the charge has been the U.S. Though new store openings in North America have slowed to a low single-digit crawl, it's where the majority of global locations are located (currently over 17,700). Thus, comps are the most important way to grow overall sales in what is still Starbucks' largest market.
What accounts for the sudden rebound in the U.S.? A lot of it has to do with the successful expansion of the Starbucks Rewards loyalty program and app. Digital ordering has helped boost sales by keeping customers returning again more often. Plus, though existing store foot traffic was flat during the second quarter, ticket size grew by 4% year over year. What that means is that customers are buying more every time they visit -- and the ability to see the full menu on the app, order ahead, and pick up a drink or snack on the fly is why.
Not the only lever, but an important one
Even though this coffee empire is already a name brand around the globe, new stores are still key to the company's continued growth. That is especially the case in Asia, Europe, and the Middle East.
It's clear that Starbucks still has a lot left in the tank as far as expanding its global footprint goes. However, as the chain continues to mature, comps will be an increasingly important metric for driving growth and overall profitability. It's also one of the main ingredients in the stock's big increase in the last year. The stock price could continue to run higher, but it will depend largely on comps maintaining their recent trajectory. Management said it expects full-year 2019 global comps to do just that, forecasting they'll be up 3% to 4%.
As previously mentioned, foot traffic at existing locations is flat, with ticket size being the sole contributor to comps as of late. It'll be tough for comps to remain strong if Starbucks doesn't start bringing more customers in the door. Nevertheless, the expectation is that Starbucks' bottom line will continue to benefit for now -- implied by a trailing-12-month price-to-earnings ratio of 36.1 versus a lower forward P/E ratio of 27.0.
Given where this coffee company is, it's a little too rich for my personal taste to go making a stock purchase at the moment. Nevertheless, shares could hold on to those big annual gains if comparable-store sales can manage a minimum of 3% growth in the quarters ahead.
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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.