How Starbucks has picked up steam again

Analysts said several developments coalesced to improve the outlook and turn investors bullish again.

By James F. Peltz / Los Angeles Times

A year ago, the outlook for Starbucks Corp. seemed as flat as a day-old latte.

The giant coffee chain’s stock essentially had been dead money for three years running, trading around $52 a share just as it had in mid-2015, as investors saw little to cheer about.

Starbucks’ annual same-store sales growth — or sales at stores open at least a year, a key retail metric — had tumbled to 2% from 7% in that span. Same-store sales in China alone, where Starbucks has been aggressively opening thousands of outlets, fell slightly during last year’s spring quarter as competition grew.

And Starbucks’ management — led by Chief Executive Kevin Johnson, who took over two years ago from longtime CEO Howard Schultz — had produced quarterly results that sometimes fell short of Wall Street forecasts.

“There were a number of concerns about Johnson’s ability to lead this company,” Morningstar analyst R.J. Hottovy recalled.

It all seemed to indicate that the Seattle firm’s remarkable expansion of the last two decades, which put a Starbucks on seemingly every other block, had reached a saturation point, ending Starbucks’ run as a hot growth company.

Not so. Starbucks’ prospects and its stock took off again a year ago and, after the company posted another strong quarter Thursday, the stock has now soared 93% in the past 12 months, making it the biggest gainer in the Standard & Poor’s 500 index in that period. With a closing price of $99.11 a share Friday, the chain now has a market value of $121 billion.

Starbucks, which had $24.7 billion in revenue in fiscal 2018, “is very much a growth company” again, analyst Nicole Miller Regan of Piper Jaffray said in a note to clients last month.

The chain, which has company-owned and licensed outlets, also continues to expand. Starbucks opened its 30,000th store in March and now has 30,626. (It had only 165 when Starbucks went public in 1992.) Nearly 3,000 of those outlets are in California, which accounts for 20% of its 14,600 U.S. stores.

What turned the tide? Analysts said several upbeat developments coalesced to improve Starbucks’ outlook and turn investors bullish again, including an expanded menu — with new drinks such as Nitro Cold Brew and Cloud Macchiato — pushing sales upward.

Starbucks also entered an alliance with Nestle last August under which Nestle distributes Starbucks’ packaged ground coffees, coffee beans and other products worldwide. The deal provided Starbucks with an initial payment of $7.2 billion and now a stream of licensing revenue.

The company’s three-year plan to return $25 billion to shareholders in the form of stock buybacks and dividends has also boosted the share price.

But two items stand out in Starbucks’ rebound, analysts said: The systems with which it cultivates customer loyalty — its smartphone app and rewards program — and its push into China.

Many retailers, from department stores to supermarkets, have mobile apps with which customers can place orders and fold the stores into their daily routines. Domino’s Pizza Inc., for instance, credits much of its success in recent years to its app.

Starbucks’ app is increasingly popular with its customers as well, enabling them to order and pay before they arrive, customize their orders, collect and redeem rewards points, find nearby stores and even identify the music they hear there.

The company has worked to streamline its app to drive higher visits and sales, juggled employees’ tasks to limit bottlenecks caused by in-store pickups of online orders, and tweaked its loyalty program to enable members to earn rewards faster than before.

“In the last year, we’ve reduced from seven to three steps to place an order” on the app, Patrick Grismer, Starbucks’ chief financial officer, told analysts this year.

Starbucks declined to comment for this story but pointed to public remarks by its executives, including that more than one-third of all transactions at U.S. Starbucks stores now are done with the mobile app. The company also says its “digitally engaged customers” buy two to three times as many products as those who don’t use the app.

“Customers are digitally savvy and expect higher levels of convenience,” Johnson told analysts Thursday, adding that an effective app produces “more frequent occasions, increased spend, improved customer retention and marketing efficiency.”

The growth of Starbucks’ Rewards loyalty program shows a sharp rise in people formally making the chain a regular part of their lives. There are now 17.2 million people enrolled in the program, up 30% from 13.2 million two years ago, and members accounted for 42% of sales in U.S. stores in the latest quarter, up from 36% two years ago.

Growth in China is also buoying the company. Starbucks now operates nearly 4,000 stores there with plans to reach 6,000 outlets in 2022, and it’s the chain’s second most crucial market, behind the United States.

As Starbucks ramped up in China, many investors fretted about competition there from the likes of Luckin Coffee Inc., a fast-growing Chinese rival that went public this year. Their concern grew when Starbucks said a year ago that same-store sales in China had slipped 1% in the latest quarter.

“That left a bad taste in a lot of investors’ mouths,” Hottovy said.

But same-store sales in China have since rebounded with the help of a sharp rise in Starbucks Rewards members there, who now total 9.1 million, and the expansion of the firm’s app usage and deliveries that are made via Starbucks’ partnership with China’s Alibaba Group.

In addition, Johnson asserted that Starbucks stands apart from Luckin and others because of the quality of its coffee, “the fact that we handcraft beverages personalized for each customer,” and that its stores provide “a warm, welcoming environment” where customers can make personal connections.

“The steps we’ve taken have further differentiated our position,” Johnson said, “and that’s exactly the direct contributor to China’s great performance. The strategy is working and we’re going to continue to stay focused on that model.”

Analyst Andy Barish of the investment firm Jefferies said “it doesn’t seem like there’s a lot of overlap” between Starbucks and Luckin, whose outlets skip the frills while offering cheaper coffee. As Time put it this spring, “90% of Luckin outlets are little more than an austere counter with coffee machines in the corner of an office building lobby.”

“I don’t think it’s a huge competitive threat at this point,” Barish said.

Last week brought more good news: Starbucks’ results for its fiscal third quarter, which ended June 30, far exceeded analysts’ expectations. Global same-store sales growth shot up 6%, which included a 7% surge in the U.S. market and a 6% jump in China.

Starbucks also raised its forecast for its full-year earnings and revenue after those items also topped estimates in the third quarter, with adjusted earnings hitting 78 cents a share and revenue climbing to $6.82 billion.

The company “has bounced back and kept going,” Barish said, and concerns about Johnson’s leadership have subsided.

But Johnson and his team know from recent history that they can’t take any rival, or customer, for granted in any market worldwide, no matter how big Starbucks becomes.

“We do not take victory laps after a great quarter,” Johnson told analysts. “We focus on staying true to our mission and values, taking care of our partners, serving our customers and delivering results.”

Talk to us

More in Herald Business Journal

FILE - In this Tuesday, June 20, 2017 file photo a Boing 737 MAX 9 airplane performs a demonstration flight at the Paris Air Show, in Le Bourget, east of Paris, France. Europe’s aviation regulator has taken a step closer to letting the Boeing 737 Max fly again. It published a proposed airworthiness directive on Tuesday that could see it clear the aircraft within weeks to resume flying after nearly two years and a pair of deadly crashes. (AP Photo/Michel Euler, file)
European regulator moves to clear Boeing 737 for flight

The move comes after the FAA already cleared the Boeing 737 Max earlier this month.

Diners Bonnie Breitman, left, and Casey McGan huddle near an outdoor gas fire as they eat lunch outside in a blustery wind Tuesday, Nov. 17, 2020, in Bellingham, Wash. Washington Gov. Jay Inslee on Sunday announced tighter restrictions in the state in response to a flood of new cases of COVID-19, the disease caused by the coronavirus. Restaurants and bars will again be limited to outdoor dining and to-go service, gyms, and some entertainment centers will be required to close indoor services. Retail stores, including grocery stores, will be ordered to limit indoor capacity and indoor social gatherings will be prohibited unless attendees have quarantined for 14 days or tested negative for COVID-19 and quarantined for a week. (AP Photo/Elaine Thompson)
New shutdown expected to cost Washington restaurants $800M

The Washington Hospitality Association urged lawmakers to figure out ways to support hospitality businesses.

Burton Clemans, an employee at Sisters for 8 years, packages up a Sisters cookie on Tuesday, Nov. 17, 2020 in Everett, Wa. (Olivia Vanni / The Herald)
Sisters closes, for now, as eateries enter another lockdown

The four-week ban on indoor dining has local restaurants pondering whether to shut their doors for good.

Washington Gov. Jay Inslee speaks during a news conference, Sunday, Nov. 15, 2020, at the Capitol in Olympia, Wash. Inslee announced new restrictions on businesses and social gatherings for the next four weeks as the state continues to combat a rising number of coronavirus cases. (AP Photo/Ted S. Warren)
Inslee announces $135 million pandemic relief plan

The state will use CARES Act dollars to help businesses and people impacted by latest restrictions.

The AFK Tavern is closing up shop on Nov. 28 after 10 years due to their lease being up and the impact of COVID on November 15, 2020.  (Kevin ClAFK / The Herald)
Game over: After 10 years, last call at Everett’s AFK Tavern

The closing is due to COVID and the end of a lease. The owner hopes to reopen elsewhere in 2022.

Steve Dickson, administrator of the Federal Aviation Administration, at the U.S. Chamber of Commerce Aviation Summit in Washington, D.C., on March 5, 2020. MUST CREDIT: Bloomberg photo by Zach Gibson.
FAA faces its own reckoning as it gives Boeing path to fly jet

The agency is devoting more time and resources to assess how pilots react to emergencies.

Middle-school counselor Shanon Baker poses for a photo in the school's library Wednesday, Nov. 18, 2020, in Sammamish, Wash. A master's degree and a full-time job weren't enough to help Baker land an apartment she could afford in Seattle's east-side suburbs. But a $750 million commitment by a partnership backed in part by Microsoft's affordable housing initiative helped do the trick. Urban Housing Ventures is cutting rents at 40% of the units in three buildings as part of an effort to make sure teachers, nurses and other middle-income professionals can live in the communities where they work. (AP Photo/Elaine Thompson)
Microsoft-led housing effort cuts rents in Seattle suburbs

The plan is to help middle-income professionals live in the communities where they work.

The father of Bhavye Suneja, one of the pilots of a Lion Air plane that crashed in Indonesia, reacts as he leaves for the airport in New Delhi, India, on Oct.29, 2018. The pilot's mother, Sangeeta Suneja, says the FAA and Boeing are bringing the 737 Max back to service prematurely. (AP Photo, file)
Pilot’s mother criticizes FAA, Boeing for rushing Max’s comeback

Her son lost control of a Lion Air plane after an automated system repeatedly pushed its nose down.

Steve Hobbs
Democratic lawmakers ask Inslee to lift ban on indoor dining

They want to try to scaling back on occupancy before forcing an end to inside service.

FILE - In this Wednesday, Sept. 30, 2020, file photo, a Boeing 737 Max jet, piloted by Federal Aviation Administration Chief Steve Dickson, prepares to land at Boeing Field following a test flight in Seattle. The FAA is poised to clear the Boeing 737 Max to fly again after grounding the jets for nearly two years due to a pair of disastrous crashes that killed 346 people. (AP Photo/Elaine Thompson, File)
After 20-month grounding, FAA clears Boeing 737 Max to fly

U.S. airlines will be able to fly the plane after software is updated and pilots receive training.

Alicia Crank, chair of the Snohomish County Airport Commission, at Paine Field on Monday, Nov. 16, 2020 in Everett, Washington. The Snohomish County-owned airfield is due to update the Airport Master Plan, considered a blue-print for long term development, anticipated land use and a requirement of the Federal Aviation Administration. (Andy Bronson / The Herald)
Time to update the airport’s master plan, and you can help

The new chair of the Snohomish County Airport Commission wants everyone to get acquainted with Paine Field.

Boeing 737 Max airplanes are parked at Boeing Field in Seattle on July 27, 2020. MUST CREDIT: Bloomberg photo by David Ryder
Once beloved Boeing is among titans headed for zombie status

Policymakers may inadvertently be directing the flow of capital to unproductive firms.