Starbucks might be about to surprise Wall Street
For years Starbucks’ shares have mirrored the company’s phenomenal success. However, recently the coffee giant has come under attack from McDonalds and other fast food giants as well as indie coffee shops. This has been reflected in the value of their share price.
After reaching a peak price of $64.87 in June, Starbucks’ shares are down 1.41% overall this year. However, Starbucks has expanded into new territories and brought greater convenience to its clients with the use of innovation. This has prompted some analysts to predict that the coffee-making giant will surprise Wall Street when it releases its fourth-quarter earnings on November 2.
Starbucks experienced tremendous growth between 2011 and 2016 with sales growth above 5%. It all changed in the third quarter of 2016 when sales growth was just 4% while for the first time transaction growth was flat. For the next quarter, sales growth remained below 5% while transaction growth was negative (-1%).
Starbucks’ growth has been affected by competition from indie coffee shops and traditional fast food giants who have widened their menus to capture some of the coffee drinking market.
Indie coffee shops are opening everywhere and have taken away the trend-focused millennials market. In contrast, the price-focused crowd is going to McDonalds for their coffee.
Changing consumer preferences have had a big influence on Starbucks’ recent performance. The competition has expanded their menu options and physical store locations to better reach a wider customer base. Therefore, consumers have been drawn away from Starbucks which has resulted in the slow down of sales growth.
As a result, Starbucks has embarked on a three-pronged response to the threats.
Response to competition
The first is Starbucks’ mobile ordering and pay app which boosted sales last quarter. Mobile payments now account for 30% of Starbucks transactions in US stores, up from 29% in Q2 and 27% in Q1.
Starbucks is concerned that it could lose its edge to independent coffee shops. Therefore, as the second part of its response, Starbucks has invested in opening high-end roasteries to maintain its upscale reputation. It intends to open 20 to 30 Roasteries, which are tourist-friendly mega-locations roasting coffee in-house and serving expensive drinks.
Investment in China
The third aspect of Starbuck’s strategy to boost sales is greater investment in China. China is Starbucks’ largest and fastest-growing market after America. It is investing heavily in the market by opening more stores in China and is taking control of 1,300 stores in three Chinese provinces.
The company also reaffirmed its goal of opening 5,000 stores in mainland China. The move is a definite indication that Starbucks sees China as its future. There are already 600 stores in Shanghai, more than in any other city in the world. The coffee chain is adding 500 stores a year in China or more than one a day. It expects to have 5,000 in the country by 2021, up from 2,800.
Chairman Howard Schultz has said he believes the Chinese market will one day be bigger than the American one. China is on its way to being the world’s biggest consumer market and already is in some important categories.
Howard Schultz has said he doesn’t know how big Starbucks will become in China. In order to beat the number of US stores, it would mean opening at least another 10,000 locations in the country. With a growth path like that ahead of it, it would be a mistake to bet against the coffee king, even if recent results have been disappointing.
Prospects for the future
These operation and strategic changes have been the reason why some analysts have become bullish about Starbucks’ prospects and why they hope the coffee giant can surprise Wall Street.
Even though Starbucks has its operational challenges, some analysts remain bullish on the coffee giant’s prospects. They are looking for 14% earnings growth over the next 12 months.
Piper Jaffray analysts believe there’s an advantage to Starbucks’ current share price as the coffee giant develops its digital efforts, expands its menu offerings, opens premium locations and more stores in China.
Some analysts are bullish about the company in the long-term. They are forecasting that fiscal 2019 will reap the benefits of an improved digital ordering system, growth from the integration of the Chinese business, and more.
“We continue to see stable near-term trends and an attractive valuation level for one of the best large-cap growth stories in consumer,” analysts wrote.
RBC Capital Markets rates Starbucks outperform with a $63 price target. Starbucks has an average overweight stock rating and average price target of $63.78, according to 33 analysts polled by FactSet.
The fourth-quarter earnings report is just around the corner, making this a great opportunity for traders to take a position. Starbucks reported a slight decrease in sales growth since the third quarter of 2016. There are though significant indicators of positive earnings growth over the next 12 months.
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