It appears the coronavirus awakened the coffee giant to prioritize leaner and more profi growth.
If you own shares of Starbucks (NASDAQ:SBUX) right now or are on the verge of buying them, congratulations. Youre obviously a forward-looking investor capable of blocking out the present headwinds. The company is currently in its third quarter of 2020, and it expects the COVID-19 pandemic to reduce quarterly sales by at least $3 billion. For the year, it expects to earn between $0.33 and $0.73 per share, down 82% from 2019 at the midpoint. These are some of the worst numbers the coffee company has ever released. You must have a vision of a brighter future: Why else would you presently invest in Starbucks?
Its a strong business with a long track record. Consider that over the last 30 years, comparable-store sales have grown every year except two: 2008 and 2009. It had $26.5 billion in fiscal 2019 net revenue, up 7% year over year. And it returned $12 billion to shareholders through share repurchases and divids.
These are all good reasons to own Starbucks stock. But you may have missed some recent developments that only strengthen your long-term bullish thesis. And some changes are expected to happen quickly, making a compelling case for buying shares. Back to growth in China
Opening new locations, known as unit expansion, is key for many retail and food service investments. Unit expansion for Starbucks is modest in the U.S. but its been stellar in China: 17% year-over-year growth in fiscal 2019. There are currently 4,400 locations in China, which is a lot. But its only half the locations in the U.S., despite China having around four times as many people. I believe Starbucks can deliver stellar unit expansion in China for years to come. New restaurant ings were temporarily paused due to the COVID-19 pandemic, but the company has already returned to growth. It added 57 net stores in April and May alone, and remains on track to add 500 net new stores this year. Thats really good, but I think just 10 specific locations are the key to Starbucks future in China. The company ed eight Starbucks Now locations in China in recent months, bringing the total to 10. These locations are a smaller format with a stripped-down menu including only those items that travel well. Thats because, while one could dine in at a Starbucks Now, its designed to primarily be a to-go order location. In a lot of ways, the concept is similar to Luckin Coffee. Luckins actual growth is under scrutiny after confirmed insider fraud. However, its likely the chain was experiencing hypergrowth, just not at the pace it claimed. If so, its a strong indicator that a digital-first to-go model is exactly what the Chinese consumer wants. As such, Starbucks is right to suddenly prioritize the development of Starbucks Now.
Its closing 400 locations If Im keen on Starbucks growth in China, why am I saying the coffee giants stock is a buy even as it closes 400 locations in the U.S.? Starbucks is running with an idea in the U.S. called Starbucks Pickup. Its similar to Starbucks Now in China. The company has decided cities dont need a bunch of traditional cafes. Rather, they need a mix of traditional and new small format to-go locations. Its closing 400 locations over the next 18 months and replacing them with the small format. When we talk about the lasting effects of COVID-19, this is a good example. Dining rooms and large real estate are liabilities when they cant be used effectively. Physical distancing restrictions exacerbate the problem, but this was true prior to the coronavirus. Companies like Starbucks and Wingstop were already experimenting with this kind of store, to better leverage labor expenses and real estate. In the future, some are even betting that restaurants will pop up without dining rooms. Ubers former CEO Travis Kalanick is investing his fortune in something called ghost kitchens, a business model that provides kitchen spaces for restaurants to rent, allowing them to effortlessly launch overnight with an exclusively to-go operating model.
Renewed urgency at Starbucks When things are going well, its easy to be lulled into complacency. And things have been very good at Starbucks for years. But the coronavirus seems to have given the company a renewed sense of urgency. Theres no mention of these smaller format stores in its 2019 annual report, and scant mention of Starbucks Now in the fourth-quarter earnings call. Today, however, these initiatives are a major priority. Eighteen months is an aggressive time for the Starbucks Pickup project, something that wasnt even on the radar a few months ago. It shows Starbucks is urgently becoming leaner as it grows, and thats something I believe will reward shareholders. Shares look like a buy today. In fact, even if you own the stock already, its time to buy more.