With Starbucks shares near an all-time excessive, the bar is excessive for the espresso chain’s investor day
Kevin Johnson, CEO of Starbucks
Scott Mlyn | CNBC
Starbucks lost billions of dollars in sales this year due to the coronavirus pandemic, but investors want to learn more about the global coffee giant’s plans to spur growth in the coming years after the crisis.
At its biennial investor meeting on Wednesday afternoon, the company is expected to present its customer recovery design.
Starbucks sales in the US and China, the two largest markets, recovered faster than expected. In its fourth fiscal quarter, which ended September 27, sales in the same store were down only 9% in the US and only 3% in China. However, a new wave of restrictions in the US could slow Starbucks’ recovery in its home market.
For fiscal 2021, Starbucks projects annual global sales growth in the same store of 18% to 23%, assuming US dining rooms fully reopen by the end of the second fiscal quarter, which ends in March.
Starbucks shares, valued at $ 119 billion, are up 15% year-to-date, at the close of trading on Tuesday of $ 101.21. The stock was boosted by positive news about the Covid-19 vaccine, hitting an all-time high of $ 102.94 last week.
The rally has made some analysts concerned about the stock’s valuation, but Oppenheimer raised its target price to $ 112 ahead of Investors Day, a gain of nearly 11% from current levels.
The following is likely to be featured in Starbucks’ investor presentation:
A new long-term outlook
Starbucks has already shared its guidance for fiscal year 2021 with investors but has not yet released an update on its long-term outlook. At its last investor meeting in 2018, the company expected adjusted earnings per share to grow at least 10% per year and long-term consolidated revenue growth of 7% to 9%.
However, the oversized impact of the pandemic on Starbucks’ business could change the way the company presents its financial goals.
“While Starbucks could replicate previously issued long-term EPS growth of 10% + in 2022 and beyond, we believe the company could be better served if a longer-term EPS, given the volatility of the COVID-19-hit quarters – Target is set, “Cowen analyst Andrew Charles said Friday in a preview of Investors Day.
A changing cafe footprint
The pandemic has pushed Starbucks to cut the deadline to improve retail space four years earlier than expected. Around 800 urban cafes in the US and Canada are expected to close, and the chain plans to build more pickup locations and drive-through lanes. However, investors will want to know more about how the transformation will change a café’s average sales volume and labor costs.
Wells Fargo analyst Jon Tower said a key question is whether Starbucks wants to upgrade current drive-through locations with features like digital menu boards and dual lanes. McDonald’s is one of the fast food chains that have updated their drive-through technology in recent years to reduce service times and increase customer satisfaction.
China is expected to be the key market for new restaurants. Unlike the US and many European countries, China was able to avoid a significant increase in new Covid cases when temperatures cooled. Starbucks sales in the same store in the country are expected to be positive in the first quarter.
“We assume that the management will describe plans to accelerate the unit growth in the coming years in detail,” said UBS analyst Dennis Geiger in a statement on Friday.
Refranchising could lead to more growth. Cowen estimates that selling the Canadian, UK, Japanese, Austrian, and Swiss markets to franchisees could translate into $ 4 billion in input tax. Refranchising also means Starbucks would only have to spend a fraction of its current spending on general and administrative expenses in these markets.
Adaptation to new habits
Millions of Starbucks customers are working from home due to the crisis. The abrupt change in behavior has resulted in an increasing number of coffee drinkers brewing their own java at home or visiting Starbucks cafes later in the day for a break.
Smaller coffee shops could have done worse during the pandemic, which could work in Starbucks’ favor and help gain market share.
However, with vaccines on the horizon, it will be interesting to see what a world looks like after Covid. Some trends, like making coffee at home, could last longer than the virus. While the coffee chain has partnered with Nestle to sell its coffee beans in grocery stores, it still needs to lure customers back to their cafes.
“Although Starbucks is active in the domestic market, the station’s returns are significantly lower than the transactions in the store,” wrote Edward Lewis of Atlantic Equities in a statement to customers.
Part of Starbucks’ recovery plan will likely be to improve its digital skills and make its loyal program even more attractive.
Additions to the menu
Over the past few years, Starbucks has turned to cold drinks to encourage customers to return more often. Colder drinks are more part of an afternoon routine than an early morning ritual. This year, Starbucks’ Pumpkin Cream Cold Brew sold the Pumpkin Spice Latte, its signature fall.
Starbucks is adding more plant-based options to its menu to appeal to customers who consume less animal products and to help meet its long-term sustainability goals. One growth opportunity is oat milk, which is popular with coffee drinkers for its texture and taste, even when added to hot drinks.
Another reason is meat substitutes, which tend to generate enthusiasm. During the summer, US cafes offered a breakfast sandwich with a sausage substitute from Impossible Foods. In China, Starbucks has a contract with Beyond Meat.