Investor enthusiasm about Starbucks (NASDAQ:SBUX) stock doesn’t look like it'll die down anytime soon. The maker of popular Frappuccinos and pumpkin-spiced lattes hit another record high yesterday after jumping more than 22% this year.
While the shares ended the May 1 session down 0.2% at $77.52, their upward momentum has been building steadily for a while, driving them up more than 33% in the last 12 months.
This powerful momentum is being fueled by the company’s upbeat forecast for 2019 coupled with visible signs that the company’s turnaround efforts are effective. For the quarter that ended in March, the world’s largest coffee-chain reported numbers that came in much stronger than the market expectations.
Its same-store sales rose 4% in the Americas, exceeding the analysts’ 3.7% growth estimate. The metric, a key gauge of restaurant success, rose 3% in Asia-Pacific and China, double the analyst estimate of 1.5%. Importantly, Starbucks also offered a very positive view for the rest of the year, upgrading its profit guidance to a range of $2.75-$2.79 for the fiscal year, up from a prior forecast of $2.68-$2.73.
No Ordinary Success
This performance is extraordinary for a mature restaurant operator in an environment where costs are escalating, competition is intensifying, and consumers are seeking healthier options than sugary Frappuccinos.
Starbucks’ powerful comeback this year shows that the chain is winning back coffee-drinkers not only in its home markets, but also in China — a country which has taken the center stage in the company’s growth strategy. The company’s future growth is very much dependent on its international success as well as its restructuring at home, which is crucial to meet customers’ changing needs.
Reporting strong growth in the last three consecutive quarters, the data-driven new CEO Kevin Johnson clearly knows what he's doing. The tactics he's employing certainly appear to be helping to attract customers and to increase their spending in the stores.
For example, Starbucks' new cold beverages — Nitro and the Refreshers line made with real fruit juice and light caffeine and green coffee extract — have provided a healthier alternative to those who no longer want Frappuccinos in the afternoon.
During the past two quarters, the number of guests in its loyalty program has grown substantially, reaching 16.8 million active members in the U.S. at the end of March quarter, up 13% from the same period a year ago.
The result of these initiatives, coupled with cost-cutting measures in the supply chain, is that Starbucks' operating income in America rose 12% from a year earlier. For the full year, the company now expects its operating margin to be up slightly instead of down.
Bottom Line
An eye-popping rally in Starbucks shares this year has made some analysts nervous as the company’s valuations became stretched, looking similar to what investors expect from high-growth technology stocks. With the market cap topping $96 billion, Starbucks is trading at a price-to-earnings multiple of 34, which is higher than Microsoft's P/E of 29 (NASDAQ:MSFT), Alphabet's of 27 (NASDAQ:GOOGL) or Facebook's of 29 (NASDAQ:FB).
Is this a sign of peaking, or the beginning of another stretch of outperformance? In our view, Starbucks stock is currently reflecting the turnaround in its biggest markets — Americas and China — and it would be risky for short-term investors to enter this trade now. But when the next pullback comes, this stock is an attractive buy-and-hold candidate for long-term investors, especially with its hefty dividend growth, that's currently yielding just under 2%, and share buyback plan.