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Here's Why You Should Retain Starbucks (SBUX) Despite China Woes
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Starbucks Corporation (SBUX - Free Report) has been banking on successful innovations, digital offerings and expansion efforts to drive growth. The company has been benefiting from robust North America comps. However, the company’s dismal performance in China remains a concern. In the past six months, its shares have fallen 22.2%, compared with the industry’s decline of 11.5%. Let’s delve deeper.
Growth Catalysts
Starbucks has been strengthening its product portfolio with significant innovation around beverages, refreshments, health and wellness, tea and core food offerings. SBUX has been leaning toward fast-growing categories like Cold Brew, Draft Nitro beverages, and plant-based modifiers, including almond, coconut, and soy milk alternatives. Apart from the numerous beverage innovations, Starbucks has been making an effort to offer more nutritional and healthy products to its customers.
The Zacks Rank #3 (Hold) company continues to focus on digitalization to drive growth. The company made progress with respect to personalized digital relationships to expand its reach among members. This includes program enhancements like Stars for Everyone. Starbucks initiated payment partnerships with PayPal and Bakkt, thereby allowing customers to recharge their Starbucks card through a range of cryptocurrencies (including Bitcoin and Ethereum) and the option of converting digital currencies to physical currency. SBUX has been exploring the blockchain platform for ways to connect the Starbucks Rewards program with other merchant rewards programs along with the motive of tokenization of stars.
The company’s North America comps have impressed investors for the fifth straight quarter. North America comps rose 12% in the fiscal second quarter, owing to an increase of 5% in comparable transactions and an improvement of 7% in average ticket. Global comparable store sales rose 7% year over year. The upside was primarily driven by a 3% rise in comparable transactions and a 4% increase in average tickets.
Despite the pandemic, the company has been focusing on expansion efforts. In fiscal 2021, Starbucks opened 1,173 net new stores worldwide. In second-quarter fiscal 2022, Starbucks opened 313 net new stores worldwide in the fiscal second quarter, taking the total store count to 34,630. Global store growth was 5.1% on a year-over-year basis.
Image Source: Zacks Investment Research
Primary Concerns
The pandemic has negatively impacted the company’s performance in China. Due to uncertainty in China, SBUX is unable to predict its performance in the country in the back half of the year. During second-quarter 2022, net revenues in China decreased 14% while sales comp declined 20% compared with the last year, after adjusting for the VAT subsidy. Due to the Shanghai lockdown and resurgence of COVID cases in other cities, the company expects its China performance to worsen in third-quarter 2022. At the end of second-quarter 2022, Starbucks noted that nearly one-third of its stores in China remain temporarily closed or are offering mobile ordering channels only.
Given the ongoing uncertainty surrounding China, increasing inflation and the significant investments that the company has been planning, Starbucks’ management has suspended guidance for the third quarter and the fourth quarter for the time being. SBUX believes its performance will be under pressure for the balance of the year, especially in the third quarter.
Dollar Tree sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 13.1%, on average. Shares of the company have gained 57.2% in the past year. You can see the complete list of today's Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and earnings per share (EPS) suggests growth of 6.7% and 40.5%, respectively, from the year-ago period’s levels.
Yum! Brands carries a Zacks Rank #2 (Buy). YUM Holdings has a long-term earnings growth of 11.7%. Shares of the company have inched up 0.1% in the past year.
The Zacks Consensus Estimate for YUM Holdings’ 2022 sales and EPS suggests growth of 4.8% and 3.8%, respectively, from the year-ago period’s levels.
Arcos Dorados carries a Zacks Rank #2. Arcos Dorados has a long-term earnings growth of 34.4%. Shares of the company have risen 14.7% in the past year.
The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 16.6% and 83.3%, respectively, from the year-ago period’s levels.
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Here's Why You Should Retain Starbucks (SBUX) Despite China Woes
Starbucks Corporation (SBUX - Free Report) has been banking on successful innovations, digital offerings and expansion efforts to drive growth. The company has been benefiting from robust North America comps. However, the company’s dismal performance in China remains a concern. In the past six months, its shares have fallen 22.2%, compared with the industry’s decline of 11.5%. Let’s delve deeper.
Growth Catalysts
Starbucks has been strengthening its product portfolio with significant innovation around beverages, refreshments, health and wellness, tea and core food offerings. SBUX has been leaning toward fast-growing categories like Cold Brew, Draft Nitro beverages, and plant-based modifiers, including almond, coconut, and soy milk alternatives. Apart from the numerous beverage innovations, Starbucks has been making an effort to offer more nutritional and healthy products to its customers.
The Zacks Rank #3 (Hold) company continues to focus on digitalization to drive growth. The company made progress with respect to personalized digital relationships to expand its reach among members. This includes program enhancements like Stars for Everyone. Starbucks initiated payment partnerships with PayPal and Bakkt, thereby allowing customers to recharge their Starbucks card through a range of cryptocurrencies (including Bitcoin and Ethereum) and the option of converting digital currencies to physical currency. SBUX has been exploring the blockchain platform for ways to connect the Starbucks Rewards program with other merchant rewards programs along with the motive of tokenization of stars.
The company’s North America comps have impressed investors for the fifth straight quarter. North America comps rose 12% in the fiscal second quarter, owing to an increase of 5% in comparable transactions and an improvement of 7% in average ticket. Global comparable store sales rose 7% year over year. The upside was primarily driven by a 3% rise in comparable transactions and a 4% increase in average tickets.
Despite the pandemic, the company has been focusing on expansion efforts. In fiscal 2021, Starbucks opened 1,173 net new stores worldwide. In second-quarter fiscal 2022, Starbucks opened 313 net new stores worldwide in the fiscal second quarter, taking the total store count to 34,630. Global store growth was 5.1% on a year-over-year basis.
Image Source: Zacks Investment Research
Primary Concerns
The pandemic has negatively impacted the company’s performance in China. Due to uncertainty in China, SBUX is unable to predict its performance in the country in the back half of the year. During second-quarter 2022, net revenues in China decreased 14% while sales comp declined 20% compared with the last year, after adjusting for the VAT subsidy. Due to the Shanghai lockdown and resurgence of COVID cases in other cities, the company expects its China performance to worsen in third-quarter 2022. At the end of second-quarter 2022, Starbucks noted that nearly one-third of its stores in China remain temporarily closed or are offering mobile ordering channels only.
Given the ongoing uncertainty surrounding China, increasing inflation and the significant investments that the company has been planning, Starbucks’ management has suspended guidance for the third quarter and the fourth quarter for the time being. SBUX believes its performance will be under pressure for the balance of the year, especially in the third quarter.
Key Picks
Some better-ranked stocks in the Zacks Retail-Wholesale sector are Dollar Tree Inc. (DLTR - Free Report) , Yum! Brands, Inc. (YUM - Free Report) and Arcos Dorados Holdings Inc. (ARCO - Free Report) .
Dollar Tree sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 13.1%, on average. Shares of the company have gained 57.2% in the past year. You can see the complete list of today's Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and earnings per share (EPS) suggests growth of 6.7% and 40.5%, respectively, from the year-ago period’s levels.
Yum! Brands carries a Zacks Rank #2 (Buy). YUM Holdings has a long-term earnings growth of 11.7%. Shares of the company have inched up 0.1% in the past year.
The Zacks Consensus Estimate for YUM Holdings’ 2022 sales and EPS suggests growth of 4.8% and 3.8%, respectively, from the year-ago period’s levels.
Arcos Dorados carries a Zacks Rank #2. Arcos Dorados has a long-term earnings growth of 34.4%. Shares of the company have risen 14.7% in the past year.
The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 16.6% and 83.3%, respectively, from the year-ago period’s levels.