ii view: Starbucks shares hit by heavy selling

It's raising wages but growing store numbers and focusing on shareholder returns. Buy, sell, or hold?

Fourth-quarter results to 30 September 2021

• Global comparable store sales up 17%
• Revenue up 31% to $8.1 billion
• Adjusted earnings per share up 96% to $1 
• Quarterly dividend of 49 US cents per share 

Chief executive Kevin Johnson said:

“Our strong finish to fiscal 2021, including record performance in the fourth quarter, demonstrates the resilience of Starbucks and reinforces the value of the bold strategic moves we have taken over the past two years. 

“Today we announce we will be doubling down on our investments in our partners, the heartbeat of our company. We anticipate that our strong business momentum, increased operating efficiency and continued global store expansion will fund these unprecedented investments while delivering yet another year of significant growth.”

ii round-up:

Coffee chain Starbucks (NASDAQ:SBUX) reported a 17% increase in comparable global store sales as consumers and tourists returned to physical outlets following the Covid-19 pandemic. 

However, that fell short of analyst forecasts for over 18%, while rising costs, largely wages, are expected to result in a fall of 4% or less in headline earnings per share over the financial year 2022. 

Starbuck shares fell by over 6% today, having gained by more than 80% since pandemic lows. Shares for KFC owner Yum Brands (NYSE:YUM) are up by over 120% during that time, while McDonald's (NYSE:MCD) has climbed around 80%. 

Comparable store sales in its core North American market rose by 22% during the quarter, aided by a 3% increase in product prices. 

Sales on the same basis for its second-biggest market, China, retreated by 7%, hindered by both localised Covid lockdowns and the reintroduction of Value Added Tax (VAT) compared to an exemption given this time last year. Comparable store sales for its remaining international business rose by 3%.

A total of 538 net new stores were opened in the final quarter of the financial year 2021, ending the period with a record 33,833 stores worldwide.  

A fourth-quarter dividend of 49 US cents per share is up on the 45 cents paid over the previous four quarters. Starbucks management committed to returning $20 billion via share buybacks and dividends over the next three years. 

ii view:

Categorised under the sub sector of US restaurants and bars, Starbucks sits among globally famed companies such as McDonalds, KFC owner YUM Brands and Chipotle Mexican Grill (NYSE:CMG). It came to the US stock market nearly 30 years ago at a price of $17 per share, or $0.53 per share when adjusted for share splits. 

For investors, elevated costs and wage growth clearly present headwinds into 2022. Ongoing pandemic uncertainty also features, as do required changes across the corporate world in addressing environmental and climate change issues. 

But the return of consumers following pandemic lockdowns is significant, and exposure to the world’s two biggest economies cannot be ignored. Neither can a commitment to returning $20 billion via share buybacks and dividends over the next three years. In all, and with the world’s addiction to coffee showing few signs of abating, and analysts’ estimating a fair value price of $129 per share, long-term momentum looks to remain in favour of this household name. 

Positives: 

• Diverse geographical footprint
• Focus on shareholder returns

Negatives:

• Uncertain Covid clouded outlook
• Rising cost pressures

The average rating of stock market analysts:

Buy