Starbucks Inc. (NASDAQ: SBUX) Stock Report
Research report from 2021, though main points still hold. Will be updated with current figures and valuation shortly.
Analysis of Starbucks, Inc.
Overview
This report conducts a fundamental analysis of Starbucks, Inc. by examining its underlying core competencies and business structure.
An overview of the company is provided, focusing specifically on earnings growth, positioning within the retail coffee industry, competitive advantage(s), management structure, financial strength, and fair price valuation.
This report ultimately culminates in an assessment of Starbucks and its predicted future valuation, with an investment recommendation.
Recommendation: HOLD
With plans for further expansion globally, centered around Chinese markets, Starbucks will be in a position to further its revenue growth. However, the company has and will continue to face stiff competition in a market that has relatively low barriers to entry. As consumer preferences and purchasing processes change, Starbucks will need to ensure it adapts and further differentiates itself from competitors who will try to do the same.
To Starbucks’ credit, they have done a commendable job in creating an image as the preferred destination for premium beverages and have cultivated a loyal customer base. Furthermore, new store formats centered around efficiency should reduce overhead costs and improve margins. However, current realignment plans will result in the closure of many existing store locations, which will ultimately slow revenue growth rates moving forward. While the company may maintain its market share moving forward, its growth strategy remains largely inorganic and associated with high operating costs. The company has also taken out significant amounts of long-term debt to fuel its expansion.
As a result, Starbucks provides a promising opportunity for share price appreciation for current shareholders. However, it is likely in its mature growth stage, where further expansion will remain inorganic, as opposed to a “hyper-growth” company. Investors seeking significant growth potential will likely not find it in Starbucks.
Key Investment Points
Starbucks has experienced considerable recent growth in its international market
segment (17% sales growth in FY2021).
A focus on implementing new efficient store formats will reduce operating costs and likely improve the company’s margins.
Starbucks has focused on product innovation and differentiation, particularly in its at-home coffee offerings, seasonal offerings, and on-the-go offerings.
Revenue is very visible due to Starbucks’ simple strategy for expansion, that is centered around the opening of new stores and product sales.
Starbucks has a vertically integrated supply chain, giving them power and oversight over their production process, supply of inputs, and distribution.
Through owning a considerable market share of the retail coffee space, Starbucks has established itself as the standard in the market for premium coffee. This has
strengthened its brand image and has contributed to the “stickiness” of its products with consumers.
Risks
Revenue growth and market share expansion are heavily reliant upon performance in emerging, competitive overseas markets (China, South America, etc.). The company has and will continue to face competition from local brands with an already established image.
As a “premium” brand, revenue is tied heavily to the disposable income of customers. In times of economic downturn or recession, revenue and profits can decrease. The company will also have to continue considering how it balances its price points, to ensure per capita coffee consumption doesn’t decrease excessively.
Revenue growth is largely inorganic (stemming from the opening of new stores). While the company has made advancements with its existing customer base (increase in rewards program revenue), it will need to continue expanding its customer base in US and international markets. Realignment processes that involve hundreds of anticipated store closures may hinder this ability.
The retail coffee market is expected to grow at the same rate as the overall US economy, while per capita coffee consumption has decreased .2% annually, resulting from higher-priced products.
Volatility in the price of inputs, specifically coffee beans, can cause fluctuations in the operating margins of Starbucks. Accelerated climate change can contribute to variations in yield.
The relationship between the US and China has experienced political intensification, which can lead to anti-americanism sentiment in Chinese markets, hindering growth.
Company Overview
Starbucks, Inc. (NASDAQ: SBUX) is a retail coffeehouse and roasting company that currently operates around the globe in 84 countries. They specialize in offering a variety of beverage options, primarily cold, hot, and season coffee. Recently, they have also expanded their product offerings to focus more on food and company-marked merchandise. Additionally, they have made an effort to capitalize on their numerous distribution channels, including company-owned retail stores, third-party grocery stores, licensed stores, and convenience retailers.
The company’s long-standing reputation as the preferred destination for gourmet coffee has vastly increased its customer base and built a strong sense of loyalty that stems from its brand recognition. Serving millions of customers around the globe, Starbucks has established itself as a powerhouse in the retail coffee industry
1. Above Average Earnings Growth
Starbucks has seen a steady increase in net revenues over the past 5 years, excluding the 2020 fiscal year, in which the COVID-19 pandemic severely impacted businesses worldwide, especially brick and mortar ones. An overview of the company’s revenue growth and driving factors follows.
Revenue Growth & Driving Factors:
Revenue increased from $21.315 billion at the end of FY2016 to $29.010 billion at the end of FY2021.
This is attributable to the opening of new stores domestically and internationally.
At the end of FY2016, Starbucks had a total store count of 25,085 stores spanning 75 countries; at the end of FY2021, the company had 33,893 operating locations.
Much of these expansion efforts are focused specifically in US and Chinese markets, with 62% of the company’s stores being located in both nations.
At the end of FY2016, the company experienced an increase in global sales of 4%; at the end of FY2021, global sales had increased to 17%.
As the company continues to expand internationally, with recent realignments in the Latin American and Caribbean markets, Starbucks seems poised to capitalize on its global revenue growth. Additionally, management plans to introduce stores with new formats centered around customer convenience. These stores will feature “drive-thru” and “Starbucks Pickup Locations” that will tie in heavily to mobile ordering from the Starbucks App, which saw an increase in usage after the pandemic. However, operating margins have not experienced the same consistent growth during the same period. An overview of the company’s margins follows.
Operating Margins & Underlying Factors:
At the end of FY2016, the company had a consolidated operating margin of 21.5%, fueled by lowering input costs, specifically coffee beans.
In FY2017, margins decreased to 18.5%, caused by increased spending on product diversification and restructure/impairment costs.
Margins decreased to 15.7% in FY2018, stemming from the licensing of food businesses to Nestle, ownership changes in East China, and selling of the company’s Tazo brand.
Operating costs increased simultaneously, with more spending on employees and product differentiation.
Margins slightly increased to 16.1% in FY2019, fueled by cost-saving initiatives and lower restructuring/impairment costs. However, margin growth was slightly offset by increases in employee wage/benefits.
Margins declined to 6.6% in FY2020 as a result of pandemic-related challenges to
retail/brick and mortar businesses. However, they increased to 16.8% at the end of FY2021 due to pandemic recovery and strong pricing in the company’s North American market. Investment spending and employee wages/benefits also increased during this period.
Looking forward, Starbucks should face little problems in increasing its revenue, due to an expansion strategy that is focused on opening more international stores. An emphasis on store formats that integrate with the company’s online/mobile ordering system should allow for an easier purchasing process that should incentivize more transactions daily. The company has significant market share of the retail coffee space, but has also recently closed significant amounts of store locations. Thus, it will be crucial that the company performs well in China, which represents a promising market for the coffee and tea market and is conducive to future growth potential. Current and potential competitors in China include Hey Tea, Nayuki, illycafe, and Tim Hortons.
In the near future, margins may not be able to increase at the same rate as revenue growth. This is partly attributable to the company’s revenue growth and expansion strategy, which focuses on the opening of new stores. As the company enters the highly competitive Chinese market, it will face high start up costs. While the company faces competition from new entrants into the specialty coffee and tea market, it has sold off specialty tea subsidiaries such as Tazo. Additionally, employee wage and benefit packages have become increasingly costly and there have been recent unionization efforts, which may eat into profits. While employee satisfaction is important, the nature of Starbucks’ business model requires more spending on workers as it expands. It will be crucial for the company to operate efficiently in overseas markets to reduce overhead costs.
2. Leadership in an Attractive Industry
Starbucks currently primarily operates within the retail market for coffee, but due to product diversification, has also entered the market for “coffee and snack shops”. An overview of the company’s positioning within the industries follows.
Starbucks’ Positioning Within the Industry:
Roughly 31.7% share of the US retail coffee market (nearly double the share of its next biggest competitor, Dunkin.
Market leading 36.2% share of the US coffee and snack shop market.
Market leading 16% share of the cafe market in China, followed closely by HeyTea (13.8%)
The company has established itself as the “premium” standard within the industry through diverse product offerings and its brand recognition.
Over the last decade, the premium coffee space has grown to be fairly large and figures to see increased competition due to several key trends:
Coffee consumption has risen considerably, with 62% of adults stating that coffee is their preferred form of beverage.
Annual per capita coffee consumption has decreased .2%
Consumers have shifted consumption to higher-end, more expensive “specialty” products. These include “specialized blends” and “espresso-based beverages”.
Retailers have shifted their production to match changes in consumer preference.
The premium coffee space and overall retail market for coffee’s performance has been dictated by trends relating to consumer preference, global economic conditions, and industry related cost-structures. These trends are detailed below.
Industry Trends:
Consumers prefer specialized, gourmet beverages as opposed to traditional “plain drip coffee”. Due to higher price points, smaller quantities are typically consumed, leading to a .2% decrease in annual per capita coffee consumption.
Consumer preferences for higher quality beverages are expected to continue into the future.
“Single-cup” coffee machines have seen a 50% increase in popularity as instant coffee has become increasingly popular due to more customers preparing/consuming coffee at home.
Prices of inputs (especially coffee beans) are expected to be less volatile moving forward.
Employee wages are expected to increase 1.9% annually, as companies focus on hiring higher skilled baristas to prepare high quality product offerings.
Industry value added is expected to match the overall economic growth rate (1.9% annually) through 2026.
New market participants continue to emerge, which has slowed profit growth. However, firms benefit from sales of high-margin products and consumer preference for gourmet coffee.
Pandemic related recovery and wage increases have led to more disposable income, creating a higher willingness to pay for premium goods. While coffee bean prices are expected to experience less volatility in the near future, rapidly changing environmental factors can contribute to inconsistent yields from farmers.
Starbucks’ Response to Market Trends:
Expanded product offerings by introducing cold-brew, seasonal beverages, and nitro drinks centered around customer convenience.
Increased their presence in the instant coffee market through numerous channels of distribution (company owned stores, licensed stores, grocery stores, convenience retailers, etc.).
While Starbucks has a strong brand recognition that has established it as a major player in the market for premium coffee, it continues to face competition in a market that has relatively low barriers to entry. Dunkin, its biggest direct competitor in the US, has achieved revenue growth due to product differentiation and strong iced coffee sales. In China, consumer tastes vary due to high population density/diversity. To maintain and grow its market share, Starbucks must continue to focus on product differentiation and innovation to match consumer preferences.
3. Sustainable Competitive Advantage
Starbucks’ Current Competitive Advantages:
- Brand Recognition
Perhaps the biggest competitive advantage, which has been built up over decades.
Customers associate the company with quality and comfort in the market for premium coffee.
With high price-pointed products, the company’s retention of a large customer base indicates a high willingness to pay for its goods/services.
Consumer preferences have shifted towards premium, “gourmet” coffee, which bodes well for Starbucks due to the nature of its product offerings.
- Economies of Scale
Rapid expansion efforts in the US and internationally have allowed the company to capture a large share of the markets it operates in.
Company is situated in most major metropolitan cities, which have the highest
concentration of likely customers.
Expansion allows the company to order inputs in bulk
- Supply Chain Processes
Vertically integrated supply chain allows the company to oversee its entire supply chain process (growth of coffee beans, distribution, etc.).
Coffee beans are sourced from over 400,000 farmers in 30 countries, who must comply with company issued C.A.F.E. standards, which ensure suppliers meet ethical and quality standards.
Company has power over deciding where its inputs come from and can switch easily in the case of its standards not being met.
Purchase of Hacienda Alsacia, a farm in Costa Rica, has allowed the company to research and develop new technologies in agriculture as it relates to coffee farming.
- Product Innovation
Seasonal variations in product offerings create excitement around the company.
Offering of baked goods in addition to baked goods increases likelihood of compounded consumer purchasing behavior.
Beverages are offered in numerous formats (traditional hot coffee, cold brew, instant coffee, etc.).
Assessment of Competitive Advantages:
- Brand Recognition
Creating a strong brand has been crucial to the company’s success as many of its products are sold at a higher average price point than its competitors.
Preference shifts towards high-quality beverages are likely to amplify the company’s brand and image.
Starbucks must remain aware of its pricing strategy and that revenue is tied heavily to the disposable incomes of customers. Economic recessions lead to lesser consumer spending power, as many may choose to switch to cheaper beverage alternatives.
Recent COVID-19 pandemic saw customer willingness to pay decrease across several segments of the market, in which comparable-store sales fell by 6% due to decreased customer traffic.
- Economies of Scale:
Company benefits from expansion, as it has been tied directly to revenue growth. This bodes well for the company’s plans moving forward.
However, over-concentration in certain market segments (i.e. metropolitan areas) has led to current and expected store closings, which are part of the company’s larger restructuring plans.
Company plans to close approximately 820 stores in the US and Canada - markets which have been a focal point of expansion efforts. This has led to increases in restructuring/impairment costs, which are expected to rise in the future.
Despite expansion efforts, the retail coffee market and cafe market has become increasingly saturated, due to low barriers to entry. New entrants are also focused on product innovation that aim to tap into niche markets.
- Supply Chain:
Company’s position as an incumbent with farmers they have entered long-term
agreements with ensures that constant supply stream will be readily available. C.A.F.E. standards give the company leverage in terms of the status of these relationships.
R&D efforts into agricultural processes tied to coffee production can reduce input costs and increase product margins (i.e. growth of hybrid coffee trees that lead to higher yield and increased land usage efficiency).
Coffee yield and pricing remain rather uncertain due to climatic conditions outside of the company’s control. Climate change leads to variability in coffee production/yield, causing volatility in the cost of coffee beans.
Increases in the price of inputs can decrease margins, leading to a slowing of revenue growth.
- Product Differentiation
Positive feedback loops created from product differentiation are useful to counteract the absence of switching costs in the coffee market.
Current emphasis on product innovation has been crucial to adapting to changes in consumer preferences.
Moving forward, with the constant threat of new entrants, Starbucks will need to ensure that it is able to accommodate the variety in consumer preference. This is especially true in emerging international markets such as China.
4. Strong Management Team and Clear Mission
Starbucks’ board of directors consists of members from a wide range of companies spanning various industries. An overview of the company’s management team follows.
Starbucks Current Management Team:
Mellody Hobson - Independent Starbucks Board of Directors Chair; Co-CEO & President, Ariel Investments, LLC
Laxman Narasimhan - CEO & President, Starbucks Corporation
Richard E. Allison Jr. - CEO & Director, Dominos Pizza, inc.
Andrew Campion - CEO, Nike inc.
Mary N. Dillon - CEO & Director, Ulta Inc.
Isabel Ge Mahe - Apple, Inc.; Vice President and Managing Director of Greater China
Jørgen Vig Knudstorp - Executive Chairman, LEGO Brand Group
Satya Nadella - CEO & Director, Microsoft Corporation
Joshua Cooper Ramo - Chairman & CEO, Sornay
Clara Shih - Executive Chairperson & Director, Hearsay Systems
Javier G. Teruel - Retired Vice Chairman, Palmolive Company
Management has experience in a wide range of skill sets including financial/capital allocation, brand marketing, technology, and international operations/distribution. Additionally, all 12 members have prior senior leadership experiences. Laxman Narasimhan, the company’s newly appointed CEO, previously served as CEO of Reckitt Benckiser Group PLC, a British international consumer health, hygiene, and nutrition company, since September 2019. Prior to this, he was with PepsiCo from 2012 to 2019, serving as the company’s chief commercial officer. While not directly involved in the coffee business, his experience in the beverage industry, as well as the overall food and consumer staples industries, should bring transferable skills directly to his new position with Starbucks. Richard Allison and Javier Teruel both have industry-relevant experience, with the former serving as the CEO of Domino's Pizza since 2018, leading it to become the “largest pizza company in the world based on global retail sales, and the latter having served as a Starbucks director since 2005. Additionally, the board benefits from its collective experience in building some of the most recognizable brands in their respective industries. This involves companies such as Microsoft, Nike, Apple, and Ulta. However, it is worth noting that only a quarter of the members have experience in the coffee industry itself.
Executive Compensation Structure/Performance:
Compensation is tied heavily to company performance and the goal of creating/improving value for shareholders.
96% of the CEO’s salary is considered “risk” compensation that is tied directly to financial performance in key metrics (adjusted operating income, adjusted net revenues, annual EPS targets, and performance compared to the rest of the S&P 500).
Executives are required to “acquire and hold Starbucks stock worth 2 to 6 times base salary”
Management has consistently increased dividends over the past 10 years and achieved a 10% increase in payouts despite the pandemic.
At the end of FY2011, dividend payments were $.17 per share; at the end of FY2021, they reached $.49 per share
Performance-based compensation structures reinforce the idea that company executives are invested in the growth of the company. Furthermore, these incentives are not only tied to share price, but also financial metrics that correspond to the company’s financial health and success adjusted operating income, adjusted net revenues, etc.). With revenue growth hinging on increasing market share through the opening of new stores, executives must remain focused on the company’s future. Stock ownership requirements affirm the best interest of executives in the company performing well.
Starbucks’ Culture:
Starbucks is focused on providing customers with quality products and a quality experience (convenience, comfortability, friendliness, etc.)
Stores provide a welcoming feeling to customers due to the amenities offered such as free Wifi and quality customer service.
The company is committed to creating a diverse, equitable work environment where employees are comfortable. It plans to launch a mentorship program that connects BIPOC (Black, Indigenous, and People of Color) partners to senior leaders that focus on the development of BIPOC talent.
Anti-racism content has been infused into the hiring and employee professional development process to foster an inclusive, accepting environment.
69% of their partner base is female and 47% is made up of people of color.
Employees have received consistent wage increases and are offered packages that include affordable health insurance, college tuition coverage, and stock offerings.
The company is committed to implementing environmentally sustainable business practices through purchasing reusable energy for powering of stores and the use of recyclable packaging.
Starbucks’ Mission:
The company aims to maintain its positive social standing and increase its market share in the retail coffee space.
While focused on expanding reach in the coffee space, it has expanded its product offerings to capture new trends in certain marketplaces (partnered with Beyond Meat and Oatly to innovate its plant-based food/beverage offerings in the US and China).
New “Impossible Breakfast Sandwich” was introduced along with oat milk in certain regions.
Growth plans place emphasis on expansion into US and Chinese markets; more efficient retail formats are being implemented to improve profitability in these markets.
Partnership with Nestle allowed Starbucks to improve its “at-home coffee presence” to 62 markets
Introduced “Starbucks Nitro Cold Brew” sold in company-operated stores and external retail markets.
5. Financial Strength
Revenue Visibility:
Company business model is rather straightforward, allowing for forecastable revenues; revenue growth is driven by more product sales and an increase in the number of stores operating.
Coffee is a rather recurring product that consumers worldwide rely on daily; Starbucks has capitalized and made its products recurring by making itself the “go-to” destination for coffee products, especially for individuals that purchase it on the way to work.
While virtually no financial switching costs exist between Starbucks and other coffee companies, its brand image and retail expansion have made it readily available and synonymous with a daily or common routine for individuals.
Due to low switching costs to other competitors, Starbucks has made an effort to use its strong brand image to further develop the bond with its customer base.
The Starbucks Rewards program incentivizes frequent purchases from customers through tailored offers (integration with their mobile app has made the purchasing and reward process more seamless); in FY2021, the company experienced a 48% increase year-over-year in rewards members who remained active for 90 days.
The rewards program has contributed to product stickiness, with it being responsible for 51% of spending in US locations.
It must be noted that revenue is tied heavily to the state of the economy and the disposable incomes of customers; during times of economic recession, customer spending and same-store sales have decreased considerably (most notably in 2020, where net revenue and cash attributable to Starbucks’ core operations fell 74.2% and 68.3% respectively)
Margin Overview/Assessment:
From 2016-2021, operating margins have experienced a relative decrease (19.57% in 2016, 18.47% in 2017, 15.71% in 2018, 15.38% in 2019, 6.64% in 2020, and 16.77% in 2021); sharp increase in operating margins from 2020-2021 was attributed to revenue growth associated with stores reopening after pandemic related closures. Additionally, realignment processes that resulted in the strategic closing of “underperforming stores” led to lower operating costs.
Variability in operating margins can be concerning considering the nature of Starbucks’ business and its plans for revenue growth. While the company benefits from economies of scale due to its large market share, the opening of new stores requires consistent spending on variable costs of production (labor costs, coffee beans, plastic cups, etc.). Consistent operating margins would indicate the company can consistently pay down its fixed costs (rent/lease, debt, taxes. etc.).
Operating margin increases in 2021 are an encouraging sign of the effectiveness of the company’s realignment plans. Efficient store formats in existing and developing international markets can contribute to even lower operating costs and therefore contribute to future increases in operating margin.
Due to economies of scale, Starbucks is able to open new stores at industry-leading efficiency. Average store build costs in the US are $680,000, which is significantly lower compared to restaurants with full kitchens such as Taco Bell, which has an average build cost of $1,280,000. Furthermore, store-level EBITDA margins are 30% for Starbucks and 27% for Taco Bell.
In China, store build costs are even lower compared to the US, at $300,000, with a higher store-level EBITDA margin of 37%. Efficient store formats can reduce build costs as the company expands, leading to higher operating margins in the future.
It is worth noting that direct competitors have also focused on reducing their build costs (Dunkin has a build cost of $580,000 in the US).
Free Cash Flow Overview/Assessment:
Free cash flow conversion has shown slight variability over the period of 2016-2021, but has generally remained over the 80% minimum threshold (115% in 2016, 94.7% in 2017, 220% in 2018, 90% in 2019, 12% in 2020, 107.6% in 2021).
High values for free cash flow conversion are encouraging as they indicate Starbucks can focus on activities that improve shareholder value (i.e. growing dividend payments and repurchasing shares) and drive business growth (i.e. product innovation and strategic acquisitions).
As the company is focused on expansion through economies of scale, higher FCF values indicate that business operations are able to consistently generate cash.
More consistent FCF values would indicate business operations are consistently able to generate cash that can be used to pay down long-term liabilities the company has accrued more frequently in recent years.
Cash & Debt Levels:
Cash levels (in millions) have increased overall from 2016-2021 ($2,128 in 2016, $2,462 in 2017, $8756 in 2018, $2,686 in 2019, $4,350 in 2020, and $6,455 in 2021).
Liabilities have increased considerably over the same period, though this is mostly from the accrual of long-term debt. In FY2021, the company reported no short-term debt.
Long term debt is the main driver in liability growth. At the end of FY2016, total liabilities were $8,348 (in millions), with $3,202 (in millions) being composed of long-term debt. At the end of FY2021, total liabilities are $36,707 (in millions), with $13,616 (in millions) coming from long-term debt.
In FY2021, the company spent $1,250 in repayments of long-term debt, the highest amount from 2016-2021.
In FY2021, Starbucks had an EBITDA of $6.23 billion with combined long-term and short-term debt levels of $13.616 billion. As such, the business is levered at 2.18x EBITDA.
Long-term debt accrual is to fund the business’ future ventures, primarily its expansion into competitive international markets with high start-up costs. While debt levels have increased, company repayments of long-term debt and a relatively low leverage rate indicate that this debt should be manageable. If the company maintains high free-cash-flow rates, then it will be able to further pay down its debt moving forward. It will be necessary for the company to not only increase revenue in emerging markets but improve its margins as well. This would be conducive to keeping liabilities manageable.
Performance in Emerging Markets:
As of FY2021, Starbucks has 16,637 company-operated stores with the majority being located in the US and China (8,941 and 4,704 respectively); 449 new stores were opened in the US and 697 in China. 952 licensed stores were opened, bringing the global total to 16,023.
In China, Starbucks Now store formats were introduced, which place an emphasis on providing a seamless integration of the digital and physical purchasing process. This format involves mobile pick-up-and-go orders, which reduces manual labor costs and improves margins.
In FY2021, the international segment experienced a 16% increase in comparable stores, with China specifically experiencing a 17% increase; the North American segment experienced a 22% increase. These increases are largely attributed to increased traffic resulting from pandemic recovery, though efficient store formats can continue to foster this growth.
Starbucks’ performance in its various market segments is encouraging, though it remains to be seen if it is primarily caused by pandemic recovery, or if this growth can be sustained. The pandemic led to changes in consumer purchasing behavior in relation to the coffee market (i.e. more at-home coffee consumption and a growing number of online orders). These changes could be lasting moving forward, which Starbucks will need to accommodate. New product offerings that provide flexibility for customers and store formats centered around convenience can both help the company financially and in the eyes of consumers.
6. Fair Price
An IRR analysis based on estimated EPS and EPS growth, with an implied forward P/E multiple follows.
Model Justification:
Exit multiple of 28.00x was implemented due to various factors, including estimated revenue growth, forward-looking EPS/EPS growth rate and historical PE multiples for Starbucks and its competitors (Figure 1 in appendix).
Revenue growth is projected as Starbucks continues to expand internationally, however, the company is already at a mature stage in its growth having encapsulated much of the US and global markets in which it operates.
Current restructuring plans, which involve over 800 store closures in North America, may slow revenue growth moving forward; forward-looking revenue growth may not model that of a “hyper-growth company” in its early stages.
Slight revenue growth will impact EPS and EPS growth rate; while EPS is expected to grow from $2.42 in 2021 to $5.00 in 2027, the projected EPS growth rate is expected to decrease from 16.1% in 2022 to 11.1% in 2027.
EPS is a key input in calculating P/E ratio; forward-looking declines in EPS growth would cause PE multiples to fall.
Starbucks’ historical P/E multiple peaked at 110 in the beginning of 2021, which was likely skewed by post-pandemic sales/revenue recovery; the company’s P/E multiple recently experienced a sharp decline to 34.48.
With decreasing projected EPS growth rates, the company’s P/E multiple will likely fall below 34.48; in comparison, median P/E ratios for industry competitors lie between 26.92 to 37.98, on average.
A forward-looking PE multiple of 28.00x falls between the median P/E multiple ranges for competitors and would indicate the company’s slight revenue growth.
The resulting IRR calculated is 4.2%, falling short of the preferred 15% minimum return. I believe this is a sign of the company’s positioning as a mature growth company within the industry as opposed to being a “hyper-growth” company. Solely on predicted returns, I do not believe that Starbucks has an attractive valuation for investors seeking significant growth potential.
Appendix
Figure 1: Comparative financial metrics for Starbucks and its major competitors