Categories Analysis, Retail

Despite short-term concerns, Starbucks stock offers high returns

The coffee culture that permeates across America is becoming popular in other parts of the world also. To take the full advantage of the growing penchant for caffeine, industry leader Starbucks Corporation (NASDAQ: SBUX) has been busy innovating the business both at home and abroad, with focus on capturing new markets and revamping the menu. Recently, the company introduced its pumpkin-spice latte and voice-enabled ordering facility in select markets.

Stock Peaks

In July, Starbucks’ shares jumped to an all-time high and traded slightly below the $100-mark, after the company posted better-than-expected third-quarter results. Though the stock retained the momentum since then, it reversed a part of the gains last week. Meanwhile, the market is bullish on the prospects of the company continuing the turnaround that began about a year ago.

Starbucks Comparable Store Sales Growth

This year, Starbucks outperformed the market and also some of the top-gainers in the upbeat tech sector. The stock has a history of bouncing back quickly, whenever it withdraws from a high. The trend is likely to continue as the current quarter progresses. With the recent bullish spell, the coffee chain that is famous for its Frappuccinos and pumpkin-flavored coffee rewarded investors handsomely.

Mixed Outlook

Analysts’ average rating on the stock in the past three months has been hold, with a price target of $95.93. The management’s recent warning of a slowdown in profit growth this year complements the analysts’ recommendation, which calls for patience. Maybe the company is trying to be extra cautious in its guidance so that the market will refrain from expecting too much from it. While the muted outlook points to a curb in the share-buyback program, Starbucks’ sustained market expansion and revenue growth guarantee decent shareholder returns in the longer term.

Related: Starbucks Q3 2019 Earnings Conference Call Transcript

Starbucks’ popular rewards program plays a crucial role in keeping the customer base intact, and the strategy is being successfully emulated by some of its competitors. The fact that the company consistently opened new locations in the past several quarters, mostly in the international market with focus on China, explains the strength of the brand. China’s contribution to same-store sales, which grew at a faster-than-expected pace of 6% in the most recent quarter, will likely increase in the coming quarters despite stiff competition.

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Risks to Growth

A major challenge facing Starbucks in the international market is the threat to its market share in China from local player Luckin Coffee. Investors should also watch out for any trade war flare-up as it could dampen Starbucks’s prospects in China, though the recent de-escalation of the tension is a positive sign. The aggressive global expansion will help the company stop depending too much on China in the long run.

Earlier, the management had raised its full-year guidance, encouraged by the solid performance in the third quarter when earnings and revenues rose sharply to $0.78 per share and $1.3 billion respectively and exceeded expectations.

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