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Tuesday, December 6, 2022

Starbucks: Consistent Growth despite Challenges

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Starbucks Corporation (SBUX) is one of the most iconic consumer brands in the world, counting more than 33,200 stores globally.

The company purchases and roasts high-quality coffees, which it sells together with handcrafted tea, and a mixture of high-quality food items through both its company-operated and franchised stores.

In addition to its flagship Starbucks Coffee brand, the company offers its food and beverages through its other brands, including Teavana, Seattle’s Best Coffee, Evolution Fresh, Ethos, Starbucks Reserve, and Princi.

While Starbucks was notably impacted by the adverse impact of COVID-19 in the retail and restaurant industries, the company managed to not only sustain robust results, but actually come out stronger.

While the stock is up 37.3% over the past 12 months, Starbucks likely remains an attractive dividend growth play, considering its ongoing developments. I am bullish on the stock. (See SBUX stock charts on TipRanks)

An Improving Performance

In late July, Starbucks reported its Q3 2021 results, with numbers coming in strong. Net revenues were $7.5 billion, suggesting a 78% increase versus the comparable period last year.

Specifically, global comparable sales grew 73%, powered by a 75% growth in comparable transactions, slightly offset by a 1% drop in each average ticket.

The massive increase in sales was attributed to COVID-19-related restrictions easing globally, and consumers’ spending habits returning to normal. To put Starbucks’ recovery into perspective, the $7.5-billion Q3 revenues were the highest quarterly revenues in the company’s history.

Consequently, adjusted earnings per share came in at $1.01 against a loss of $0.46 in Q3 2020, due to the one-off expenses the company had to undertake in the midst of the pandemic.

In parallel with the company’s recovery, Starbucks continued to expand its global presence. During the quarter, Starbucks opened 352 net new stores, lifting its total locations to 33,295 stores globally. Of these, 50.6% and 49.4% were company-operated and licensed, respectively.

Management felt confident enough to hike its FY2021 guidance, expecting 18% to 21% global comparable sales growth, and reiterated around 2,150 new store openings.

The company now expects $29.1 billion to $29.3 billion in net revenue (previously $28.5 billion to $29.3 billion), and adjusted EPS of $3.20 to $3.25 (previously $2.90 to $3).

Valuation, Dividend Growth

At its current share price, Starbucks is trading at around 35 times management’s EPS guidance. That’s notably higher than the stock’s historical average. Then again, analysts expect double-digit EPS growth in the medium-term, which somewhat explains the current premium.

Robust EPS growth in the medium-term should also be able to sustain Starbucks’ double-digit DPS growth. The company’s three-year DPS CAGR (Compound Annual Growth Rate) stands at 12.6%. At its current annual DPS of $1.80, the payout ratio comes at 55% at the midpoint of management’s guidance.

Hence, future hikes should be rather comfortable, combined with Starbucks’ expected EPS growth. The current yield of 1.51% is not that enticing, but considering the company’s growth prospects, it makes for a nice addition, in terms of the stock’s total shareholder return potential.

Wall Street’s Take

Turning to Wall Street, Starbucks has a Moderate Buy consensus rating, based on 13 Buys, five Holds, and zero Sells assigned in the past three months. At $132.23, the average SBUX price target implies 16.6% upside.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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