Starbucks Stock: Reinvention Plan Optimism (NASDAQ:SBUX)

Starbucks Shares Drop 7 Percent After Q4 Earnings And 2022 Forecast Is Released

Justin Sullivan

Written by Nick Ackerman. This article was originally published on September 14th, 2022, to members of Cash Builder Opportunities.

Starbucks Corporation (NASDAQ:SBUX) just announced some exciting news during their investor day. An overall sour market overshadowed the investor day due to higher-than-expected inflation. However, that doesn’t make the guidance they provided any less exciting as they increased their forecast across the board.

The company had previously suspended guidance for 2022 as the company grappled with COVID lockdowns in China. Union noise has also been causing a stir within the company.

The immediate resignation of their CEO and Howard Schultz stepping back in as interim CEO have all put additional pressure on the company. This has been reflected in the stock’s share price on a YTD basis. I’d also believe that quite a bit of this is just simply the overall weakness in the market, too, in general.

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YCharts

More recently, they’ve been clawing back some of the gains from the lows. They’ve even bucked some of the latest downside trends as we gain more clarity on the future of the company. My assumption is that China won’t be in lockdown forever, and the latest guidance reflects their optimism too. The latest guidance can also be what propels us back to over $100 a share.

The new CEO being announced only adds more clarity, with Laxman Narasimhan coming in to fill the role. It has Howard Schultz confident enough to say, “I am never coming back again,” as the CEO of SBUX. Although, he will be keeping a closer eye on the new CEO as he plans to stay on the board of directors. Additionally, there is a long and unusual transition period here. Narasimhan won’t become the CEO until April but will spend the first six months under the wings of Schultz. This might be a bit unusual, but I see it as a strength as Narasimhan can get integrated into the company from the best leader there is for SBUX.

Reinvention Plan Leads To Upped Guidance

The company had suspended its guidance for 2022 due to the uncertainty of everything we mentioned above. Now with greater clarity, they are providing guidance that has exceeded what they were expecting previously for the coming years.

They anticipate they will be able to target these higher EPS and revenue levels by putting more investments into the business with increased store openings, higher margins, and resuming share buybacks. Store openings are expected to grow at 7% annually, up from 6%.

The numbers they expect from fiscal 2023 to 2025 include comparable store sales growth to be 7 to 9% each year. That was up from 4 to 5%. In fact, this will be helped out not only by increased store openings and resuming share buybacks but especially because of China. While they are locked down now, China’s numbers will be much easier to hit in the coming years.

The non-GAAP EPS is expected to grow between 15 and 20% annually through the same period. That makes it a meaningful increase from the 10 to 12% range in the prior guidance. Revenue growth is expected to be 10 to 12%, up from 8 to 10% previously. Higher EPS expectations above revenue expectations reflect their anticipation of higher margins and the share buybacks being resumed.

The buybacks are expected to provide an EPS benefit of 1% in 2024. Between the dividend and the buybacks, they are expecting to return $20 billion to shareholders over the next three years. The company had suspended buybacks soon after Schultz stepped back in. Instead, that money would go to revamping the stores for better speed and experience for customers and employees.

That was short-lived, though, as the latest quarter showed just over $4 billion in shares being repurchased. Additionally, they spent around $1.7 billion on dividends.

From a shareholder return perspective, although we announced the suspension of share repurchases for the balance of fiscal year ’22, we have nearly returned $6 billion between share repurchases and dividends during the first three quarters of fiscal ’22. Additionally, we remain committed to sustaining an attractive dividend and continue to target an earnings payout ratio of approximately 50%, which is near the top end of growth companies of our size and scale. Our commitment reflects our confidence in the strength of the business and to returning compelling cash distributions to shareholders while retaining balance sheet flexibility and funding our investments.

The continued commitment to the dividend is a key reason why I own this stock in the first place. Given they target a payout ratio of 15%, we can expect that their dividend can continue to grow around 15 to 20%, given their latest guidance.

SBUX Dividend History

SBUX Dividend History (Seeking Alpha)

Their last increase was around 8.9%. We should expect to hear the next dividend being declared by year-end. Given that we are still in their fiscal 2022, that’s running weak; I’m not overly optimistic this one will be a tremendous increase. I think we would need to start seeing the results of their guidance first.

Around another 8% increase could be realistic, though. That would bring us to a quarterly payout of around $0.53, and annually that would be $2.12 from the current $1.96. I think that will only further put some added support to the share price itself. Once EPS starts to catch up closer to that 50% target, then we could see higher increases. That being said, it is still rivaling the rate of inflation.

EPS estimates from analysts could also increase with the better guidance given. However, growth is already expected, which is in the range of what SBUX just provided.

SBUX Analyst Estimates

SBUX Analyst Estimates (Seeking Alpha)

In the last twelve quarters, they only missed EPS estimates three times. For revenue, they missed four out of the last twelve quarters. So, they have a fairly strong record of beating the market expectations.

SBUX Valuation

While a move higher might make it seem like it would make SBUX quite expensive, historically speaking, it isn’t highly overvalued based on its historical P/E average trading range. With increased estimates in EPS coming in now, it likely can push the stock higher.

SBUX Fair Value

SBUX Fair Value (Portfolio Insight)

Analysts have an average price target of $95.31 (as of September 14th.) That price isn’t likely reflecting any of the new guidance the company just provided, though, as it was literally just announced. I would suspect that this price target moves up a bit further. Not to mention, it always seems like Wall Street analysts start jumping in when the price is already moving higher. So another catalyst for increasing share price targets is simply an increasing share price in itself. It basically works in reverse, too; as SBUX was crashing, analysts jumped in and lowered their price targets and ratings.

I know I was early in selling puts and being assigned shares of SBUX at $101, but I have remained optimistic about the name. It has taken some patience, but that is to be expected when we are in a bear market.

Conclusion

I remain optimistic and continue to own shares of SBUX happily. They are going through a challenging time, more so than other companies. In terms of the share price, that seems to be the reason behind added pressure and the weaker performance. Given the new CEO announcement and guidance, we have greater clarity in the future. The guidance was also quite optimistic, despite the continued short-term headwinds of China lockdowns. Therefore, I probably wouldn’t expect to see shares run sharply higher. I think we see it gradually as results are achieved, seeing the share price and dividends rise over time.

For an anecdotal example, I spent time traveling recently over a few days. On my travels, the Starbucks stores I ran across often had their drive-thru lines out to the road, including on the road. People were parking in other parking lots (as I was myself), having to walk over into the store. There just wasn’t enough space to get into the stores. This seems to coincide with the latest report from Schultz. Starbucks appears to remain immune to inflation as they reported record weekly sales when bringing the fall menu back. This is after several price hikes.

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