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Starbucks All of a Sudden Looks Bullish. But Why?

starbucks

In what initially looked like a stagnant year ahead for Starbucks now looks set to be a promising one. As per its recently published third quarter earnings report, long-term growth at the global coffee franchise looks highly promising. 

In a nutshell, while analysts had predicted an earnings per share of $0.72, Starbucks smashed through this by reporting $0.78. In terms of same-store growth, this came out at a better-than-expected 7%. 

It was the huge marketplace of China that has been accustomed to the most remarkable growth levels. While growth was virtually non-existent this time last year, with figures hovering around the -1% to 1% region, Starbucks reported same-store sales growth of 6%. 

In other areas, Starbucks also saw good results in its digital membership scheme. Third quarter results showed that the company acquired an additional 14% in memberships.

With an at the time writing price of $98.90 per share, those buying stocks a mere 12 months ago will now be looking at gains of surplus 90%.

An Increase in Coffee Prices has not Deterred Store Traffic

Prior to the earnings report, the general consensus within the stock brokers space was that while Starbucks were continuing to rise their prices, this was not being complimented by an increase in customer numbers. 

However, foot traffic actually grew by 3% during the quarter, illustrating that operating margins are once again on the increase. As per Alliance Bernstein analyst Jim Tierney, “the knock on the company had been that you’re raising prices but you’re not getting traffic, and that had been a big concern.” However, as per the earnings report, Tierney notes that foot traffic was “absolutely phenomenal.”

Starbucks All of a...

Simple Improvements Have Been Highly Effective

When explaining some of the key factors that led to the better-than-expected traffic results, management at Starbucks made reference to a number of points. Firstly, while stores were traditionally cleaned during standard opening hours, this has since been changed. By cleaning after-hours, this has facilitated additional sales, and a greater focus on  customer service. 

Moreover, the coffee shop franchise has recently introduced a number of happy hour promotions during the otherwise afternoon slump, further driving increased revenues.

As noted earlier, Starbucks has also experienced greater success in its digital membership program . With an additional 14% in membership rates achieved during the quarter, Starbucks explain that this is largely down to being in possession of more information on their customers. Specifically, the company has been targeting its most loyal customers to ensure they remain repeat visitors.

Are Starbucks Stocks now Over-Inflated?

So what does the future hold for Starbucks stocks? Well, some argue that at 32 times expected earnings, prices are potentially inflated. As per Matthew DiFrisco of Guggenheim, “with an expectation that same-store sales will slow down with more normalized comparisons, we see limited upside to the current premium multiple Starbucks shares are trading at. 

As such, it might be wise to allow the markets to cool down before jumping on the Starbucks wagon.

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Kane Pepi

Kane holds academic qualifications in the finance and financial investigation fields. With a passion for all-things finance, he currently writes for a number of online publications.