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Stock Strategist

Starbucks Is Set for Growth

We're more optimistic about its medium-term potential and have raised our fair value estimate.


We believe Starbucks’ (SBUX) recently reported fiscal third quarter will mark a turning point in the investment narrative, where the market shifts its focus to how customer experience, menu innovation, and digital initiatives solidify the company’s wide economic moat and position it for future growth. The key highlight from the quarter was comparable growth of 7% in the United States (4% ticket, 3% transaction) and 6% in China (4% ticket, 2% transaction), indicating that Starbucks is working through the experience and innovation issues we’ve called out in the past and validating why this stock was our top pick heading into the year.

We think Starbucks can maintain its current growth trajectory for several reasons. Our discussions with personnel at legacy and remodeled locations indicate that simplified operations and labor reallocation efforts are unlocking meaningful throughput capacity and improving speed of service. While the recently announced Brightloom partnership is meant to assist international licensed partners in developing a digital flywheel, we believe it can also lead to experience refinements and new convenience-focused Starbucks formats (similar to Starbucks Now in China). In addition, Starbucks’ innovation pipeline is strong: The Nitro Cold Brew platform will continue to be a key sales contributor as it is rolled out nationwide, international consumer packaged goods products have been well received in new markets via the Global Coffee Alliance, and replacing Mercato with a new fresh food program should have a positive impact in 2020. With loyalty member acceleration and increased delivery footprints in the U.S. (which will have national coverage through Uber Eats in early 2020) and China, we see 4%-5% global comps as realistic in the next two to four years.

R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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