How Starbucks is Positioned for Growth

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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