Since its initial public offering in 1992 for $17 a share, Starbucks’ [SBUX] share price has ridden a caffeine-fueled rush to hit an all-time high of $64.57 last June.
2018, however, has seen the stock price experience some hefty volatility. First came a 6% fall in January, when earnings missed Wall Street forecasts as sales at its 13,930 US stores grew just 2%.
Things got worse in April when a racially-charged incident at a Philadelphia store resulted in 8,200 outlets being closed for a day as staff received racial-bias training. The impact was felt in June with a 2% fall in share price during after-hours trading, subsequent to second-quarter earnings.
The fallout continued, with the company scaling back plans to expand the number of stores after it revised its third-quarter targets. Between 6 June and 28 June, the share price fell 15% to $47.37, a 52-week low.
NASDAQ interactive chart, as at 5 November 2018
Despite this, the stock has clawed back losses thanks to two things: technology at home and expansion into China.
Starbucks expands into new technology and China
One thing’s for certain: Starbucks can’t be accused of giving up without a fight. Take its use of both loyalty program Starbucks Rewards and mobile apps to create personalised experiences to drive sales.
Through a canny use of data, the Seattle-based company can recommend new drinks to customers or understand when they are more likely to purchase a coffee.
"There is a whole bunch of other products that, through data, through the relationship that we have in the loyalty program, through the app, we can expose our customers to other things they might like." Starbucks' VP of loyalty and partnership marketing Kyndra Russell told a panel in New York last month.
Its mobile app has also been a success, accounting for 40% of payments in the US (in China its 60%).
Having added 1.9 million active users onto its loyalty program in the past year, continuing to build this highly-targetable segment could mitigate against domestic headaches.
And while sales slowed at home, one area where Starbucks has been able to brew growth is China, where same-store sales have experienced 4% and 6% growth in the first two quarters of the year respectively.
To continue this momentum, the company has partnered with Chinese e-commerce giant Alibaba [BABA]. The partnership announced in August includes deliveries via Alibaba’s on-demand service Ele.me in Beijing and Shanghai, and will be rolled out to 2000 locations by the end of the year.
Competition, however, has been surprisingly stiff. Among a bunch of upstart local competitors, Alibaba rival Tencent [TCHEY] has backed local coffee chain Luckin in a bid to pinch some of Starbucks’ custom.
Wake up and smell the share price
Third-quarter total sales came in at $6.31 billion in July, up 11.5% compared to the same quarter last year. Same stores sales also increased 1% globally compared to a predicted 0.9%.
Thursday saw Starbucks continue to record growth with fourth-quarter revenues of $6.30 billion, beating the $6.27 billion forecast by Wall Street. Same-store sales were up 3% globally, with 4% growth in the US and 1% in China.
Starbucks Rewards membership also frothed 15% to 15.3 million members year-on-year, while mobile transactions accounted for 14% of business in the US.
|Earnings per share (EPS) percentage change, Q3 YoY||+13%|
|PE Ratio (TTM)||20.28|
Yahoo finance, as at 5 November 2018
Last month, Bill Ackerman’s hedge fund invested $900 million in Starbucks. With the share price surging almost 10% in after-hours trading following the earnings announcement, a substantial return on investment.
Starbucks likes to reward its investors. An investment in 1992 would have seen a compound annual growth rate of 22% a year. Now the company’s use of technology to increase sales and expansion into China – where it plans to build 500 new stores every year for 5 years –looks to have rewarded investors once again.
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.