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How Starbucks is Positioned for Growth

With new restaurant formats and operational efficiencies, we think Starbucks is poised for profitable market share gains in the years to come. We plan to raise our fair value estimate.

Wide-moat Starbucks' SBUX fiscal 2020 fourth-quarter update offered a comprehensive outlook for fiscal 2021 and beyond, and while there are still macro and COVID-19 variables at play, we believe recent comparable momentum (notably, U.S. comps moved from an 11% decline in August to a 4% decline in September), early traction with new restaurant formats, and new operating efficiencies paint a picture of massive yet profitable market share gains in the years to come. We plan to raise our $90 fair value estimate by 5%-10% to reflect this upside and see the shares as moderately undervalued.

We believe investors should home in on three takeaways from Starbucks' guidance. First, store portfolio optimization efforts in 2021 (management now expects to close 800 largely urban locations in the U.S. and Canada in 2021, up from 600, while opening up 850 primarily drive-thru and pickup stores) allow Starbucks to remove underperforming stores from the comp base while fine-tuning new store formats before accelerating growth in the future. Second, while it doesn't expect to return to positive comps until the end of the fiscal second quarter in the U.S. and the end of the first quarter in the international segment (a byproduct of convincing holdout consumers to return to stores, something we've heard from other operators), we believe menu innovations, new loyalty program members (90-day active members up 10%), and enhanced digital capabilities like curbside pickup give Starbucks multiple paths to meet or even exceed its full-year comp expectations (17%-22% in the U.S./Americas, 25%-30% in the international segment). Finally, because Starbucks continues to invest more heavily in its business than peers (including employee wages/benefits), 2021 adjusted operating margins may look soft (16%-17%) and profitability will likely lag sales growth, but we anticipate fewer operating disruptions over the near term while offering enough efficiencies to meet its adjusted EPS goal of $2.70-$2.90.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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