Why We Agree with Ackman on Starbucks
The wide-moat firm remains one of our top ideas in restaurants.
By and large, our positive long-term outlook on wide-moat Starbucks (SBUX) was reinforced by the investment case laid out by Bill Ackman to support his $900 million stake at the Grant's conference on Oct 9. While it won't be an overnight turnaround, we believe the U.S. same-store sales corrective measures were the highlight of the presentation, most notably a focus on premium product innovation and boutique concepts (helping satisfy "experience" customers who have switched to other specialty coffee chains) and increased store labor and improved mobile order and payment app (to address the needs of "convenience" consumers). Coupled with new healthy/better-for-you cold beverage and food innovations, a loyalty program enrollment and afternoon daypart transactions, Ackman's proposed slowdown for U.S. licensed store growth (reducing potential cannibalization), we see a path for 3% comps over the next two years (with acceleration beginning in the second half of fiscal 2019) and 4% over a longer horizon.
We've also long held the belief that Starbucks' CPG and China assets were underappreciated, points that Ackman laid out. Luckin Coffee and other delivery-first, value-priced competitors have been disruptive to Starbucks China, but we still identify a compelling long-term story there (backed by strong consumer demand and favorable unit economics). Starbucks has been behind the delivery curve, but we believe the nationwide rollout of delivery via Alibaba's Ele.me in 2019 will help bring China comps back to the low/midsingle digits. We also believe the CPG partnership with Nestle can more rapidly unlock long-term value due to Nestle's global distribution network and single-serve platform.
We're not planning changes to our $64 fair values estimate, and while we expect stock price volatility as Starbucks rolls out strategic initiatives and introduces 2019 guidance, we believe investors are effectively being paid to wait with a 2018-20 cash return target of $25 billion.
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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.