7 Things To Know About Starbucks Corporation (NASDAQ:SBUX)

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After posting a 17% spike in fiscal 2015 sales to $19.2 billion, Starbucks Corporation (NASDAQ:SBUX) is looking for more growth in fiscal 2016. Starbucks’ 2016 revenues are projected to reach $21 billion with earnings coming in the range of $1.87-$1.89 per share.

The chart below captures Starbucks’ annual revenue trend.

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Starbucks is looking to continued efficiency drive, menu innovation and store footprint expansion to fuel sales and lift profits in the coming quarters. The company could also benefit from some one-off advantages, such as savings from lower costs of supplies. For example, Starbucks is hoping to make some savings in the purchase of coffee in the current fiscal year, given that at least 90% of coffee prices are favorable compared to the previous fiscal year prices. Savings made from coffee purchases could be reinvested to drive further EPS improvements or boost shareholder returns.

The strength in Starbucks

  1. On the technology front-row

Starbucks Corporation (NASDAQ:SBUX) is investing heavily on its digital transformation and the efforts are already paying off. In the last quarter, for instance, more than 20% of revenues were booked through mobile, a milestone that the management attributed to the rollout of Mobile Order & Pay service. The mobile app allows customers to place advance orders and pay for orders through their handsets to avoid standing in the line.

Digital rollout in Starbucks stores is brewing benefits for the company. Implementations such as Mobile Order and Pay alongside loyalty programs are attracting more store traffic and boosting sales and profits. The trend is likely to continue in the coming quarters and possibly years as Starbucks maintains its drive to stay on the front row of retail technology adoption.

Technological implementation is enabling Starbucks to improve efficiency, drive sales growth and tap more profits. Additionally, digital rollouts are also opening up extra monetization opportunities for the company. For example, the company has partnered with The New York Times to serve digital news to its customers, a strategy that also contributes to incremental earnings.

  1. Better staff treatment boosts U.S. sales

The U.S. is Starbucks Corporation (NASDAQ:SBUX)’s largest single market and a key driver of sales in the Americas region. Comparable store sales in the U.S. rose 9% in 4Q compared to 8% globally. Total sales in the Americas rose 11.3% year-over-year to $3.38 billion in 4Q. The spike in U.S. sales followed a recent move by Starbucks to sweeten wages and benefits for its staff in the market. The launch of Mobile Order & Pay app also fueled U.S. sales in the quarter. About 21% of 4Q transactions happened on mobile.

With the successes witnessed from the highlighted U.S. implementations, Starbucks could trigger more sales growth in other markets if it replicates the same strategies there.

  1. China story

Headlines from China have been a cause for concern among many investors as the economy there is depicted as stalling. However, the latest quarter showed that Starbucks was able to sidestep troubles in China as sales in the country spiked beyond expectations. Starbucks registered 110% increase in sales in China and Asia Pacific to $652.2 million in 4Q2015. The company, which already opens a new store each day in China, looks to launch 900 new stores in Asia next year.

Despite all the noise about China’s cooling economy, Starbucks sees a market that could, in the coming years, grow larger than the U.S. for its sales.

If China’s current economic pressures improve quickly, Starbucks looks to gain more from its operations in the country. But if economic recovery in China drags, Starbucks has shown that it is capable of escaping pressures in the market.

Potential pressure points

  1. Weak economic conditions

Starbucks Corporation(NASDAQ:SBUX)’s business depends on the strength of consumer discretionary spending, which can be affected by factors such as high unemployment rates, limited access to credit and generally deteriorating macroeconomic conditions. While the economic situation in the U.S. has been largely favorable for Starbucks in 2015, the economic cold spreading in China and spilling abroad could slow down Starbucks’ sales momentum.

Closely related to the issue of deteriorating economic conditions are currency translation pressures. Starbucks generates a significant portion of its sales outside the U.S., with the U.K., Japan and China accounting for a majority of the company’s international sales. Because of its huge exposure to the global markets, Starbucks is subjected to multiple economic dynamics from political instability to unfavorable currency translation terms that can have detrimental impact on its operational performances.

  1. Supply chain pressures

Availability and cost of commodities, such as coffee beans, flour and milk, greatly affect Starbucks’ business. Adverse weather, natural disasters and political turbulence can disrupt supply and pricing of the commodities that Starbucks depends on, thus interfering with smooth operations and contributing to weak sales and profits.

  1. Drastic shift in consumer perceptions

Over the years, Starbucks Corporation (NASDAQ:SBUX) has perfected the art of studying consumer trends, tastes and preferences to deliver their expectation. However, drastic changes in consumer preferences as a result of dietary concerns or unfavorable media coverage can have a profound negative impact on Starbucks’ sales and profits. The risk of unprecedented shift in consumer preferences is never far from the surface.

  1. Risky bets

For a long time, Starbucks Corporation (NASDAQ:SBUX) has sought to be a leader in retail technology and for the most part, the strategy has paid off. The management recently highlighted how digital implementations such as mobile ordering and paying was fueling sales, cutting customer queues and improving store experience.

With the benefits flowing from technological implementations, Starbucks feels elated to continue putting more money on technology investments. For fiscal 2016, Starbucks looks to bolster its digital spending, targeting to invest between $250 and $275 million in digital implementations. It channeled $145 million to its digital transformation in fiscal 2015.

However, overambitious investment in technology can lead to risky bets that can subsequently tear the company’s resources and limit its future executions.

Takeaway

Successful digital implementations, menu updates and expansion into new regional markets could keep Starbucks Corporation (NASDAQ:SBUX) growing for years to come. But there are several risks to avoid.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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