Could Starbucks’ Pecan Crunch Oatmeal Latte Help 2x Stocks?

(Note: Starbucks’ fiscal year 2024 will end in September)

Starbucks (NASDAQ: SBUX) is adding a new drink Pecan Crunch Oat Milk Latte to its lineup and is receiving good reviews. What makes this drink different from other seasonal favorites? This drink has a pecan pie-inspired flavor that evokes Thanksgiving nostalgia. It aims to bridge the gap between the everyday responsibilities of the fall season and the festive indulgences of the upcoming holiday season. This drink has the potential to be a breakthrough product for the company, illustrating the impact that a single, game-changing offering can have on a brand’s trajectory. An example is Apple (NASDAQ: AAPL), whose iconic products such as iPhone, iPad and Apple Watch, etc. have gained devoted fans and strengthened the company’s position in the market. Starbucks can also replicate this success by establishing a signature offering that appeals to consumers, strengthens brand loyalty, and drives business growth.

Could Starbucks stock rise to $190 from its current level of around $95 in the next few years? Does this sound a bit absurd? Consider this – Starbucks stock was trading at around $126 per share, which is almost 1.3 times its current value as of July 2021. Below, we analyze a scenario in which SBUX stock doubles from current levels, taking into account three key indicators: revenue, net margin and price. up to multiples of earnings.

Overall, SBUX stock’s performance relative to the index has been poor over the last 3 years. The return on this stock was 11% in 2021, -13% in 2022 and -1% in 2023. This means that in 2021 and 2023 it underperformed the S&P500 index. In turn, the Trefis High Quality Portfolio, which includes a collection of 30 stocks, is less volatile. And so it happened has outperformed the S&P 500 every year during the same period. Why is this so? As a group, HQ Portfolio shares delivered better returns with less risk compared to the benchmark index; less of a roller coaster as seen in the HQ portfolio performance metrics. Given the current uncertain macroeconomic environment with interest rate cuts and multiple wars, could SBUX find itself in a similar situation to 2021 and 2023 and worse than S&P in the next 12 months – will it be a strong jump? We have revised ours Starbucks valuation to $97 per share, based on expected EPS of $3.58 and a P/E multiple of 27.1x for fiscal 2024 – almost on par with the current market price.

Starbucks’ revenues and margins could increase in the coming years

Starbucks revenues rose from $29 billion in 2021 to $36 billion in 2023 as the company’s strength in digital ordering helped it quickly rebound from a pandemic setback. During this period, the company saw strength in both its U.S. operations and its international segment. However, the company’s sales so far in fiscal 2024 have seen a significant decline. The company’s total sales, including new stores, fell 1% year-over-year (year-over-year) to $9.1 billion in the third quarter (ended June 30), while comparable global sales fell 3%. It should be noted that comparable transactions in the US declined by 6%, taking the blame for much of the decline. Inflationary pressure also had a major impact on the company’s poor results this year.

Starbucks’ net margins (net income, i.e. profit after costs and taxes, calculated as a percentage of revenues) decreased from over 14% in 2021 to approximately 10% in 2022 due to increased operating costs and increased promotional activities. Nevertheless, the company’s net margin increased to approximately 11.5% in 2023 due to sales growth and operational efficiency in stores. Net margin for the third quarter was 11.6% (down 90 basis points year-over-year), and earnings per share decreased 6% year-over-year to $0.93. Markets are likely betting that Starbucks’ margins could eventually rebound and then rise to historic levels as the company has its turnaround plans in order.

Why?

Starbucks is the world’s largest coffee chain. It has nearly 39,500 stores worldwide, including more than 18,000 in North America, and continues to open new stores rapidly. A total of 526 net new stores were opened during the company’s fiscal third quarter, and the company sees plenty of expansion opportunities in the future. The company expects to have 55,000 Starbucks stores in 100 different markets by 2030, with 75% of that expansion occurring outside the U.S. market. Nearly 18% of the company’s stores are located in China, making this country its most important area internationally.

The coffee business is profitable because it allows repeat purchases, which puts Starbucks in a strong position. Starbucks’ coffee products do not involve significant technological disruption, and the slow pace of industry development should help Starbucks survive in the long run. Starbucks is a company with several competitive advantages. These include the brand, a successful rewards program, a wide range of in-store experiences and ready-to-drink beverages in stores. Starbucks reported 33.8 million active Rewards members in the U.S. as of June 30, up 7% year-over-year (also up 2% quarter-over-quarter compared to Q2 2024). Consumers are also willing to pay for products they consider premium based on Starbucks’ high gross margin (~67%), which gives the business room to absorb higher production costs while remaining profitable. Starbucks has consistently been able to raise prices throughout the US inflation environment – and its most loyal customers continue to come despite higher prices and inflationary pressures – which shows the strength of its business.

Former Chipotle CEO Brian Niccol took over as Starbucks’ new CEO earlier this month, and he identified four main areas for improvement in his turnaround plan. Its initial plan is to focus on operations in the US. We focus on giving baristas the tools they need to consistently make great drinks themselves. He then mentioned the timely delivery of quality food and drinks every time. Third, he wants Starbucks to return to being a community coffee shop by improving the customer experience. And finally, he wants Starbucks to get back to telling its story. The company owns a coffee farm in Costa Rica, which is a base for coffee research and innovation. However, Niccol noted that the company rarely talks about it.

All in all, high expectations were already set following Niccol’s appointment, and SBUX’s share price is currently ~26x. However, we believe that at a forward P/E of 24.2x based on 2025 EPS estimates of $3.95, the stock is still trading below the level at which it has often traded over the last few years (P/E in the range ~20-s ).

How does this affect Starbucks’ valuation?

If we assume that revenues grow by approximately 1.26x from 2023 to 2027 and that margins increase from 11.5% in 2023 to approximately 21% in 2026, which is approximately a twofold increase, this would mean that revenue The company’s net income could increase from approximately $4.1 billion in 2023 ($3.58 per share) to approximately $9.5 billion (approximately $8.29 per share). Good times make it easier to imagine even better times – and when they do, investors may begin to view Starbucks in a better light, reassessing the company’s recovery path. For example, if Starbucks investors target a multiple of 23x on a stronger growth trajectory, that could translate to a Starbucks stock price of around $190 per share by the end of 2027, assuming earnings of $8.29 per share.

What about the time horizon for this positive return scenario? While our example illustrates this for a 2027 timeline, in practice it won’t make much difference whether it takes three or four years. If the situation continues and Starbucks improves its key metrics, we could see significant gains in the stock market. It’s a huge business, and Starbucks has valuable know-how in a competitive market. Our analysis suggests that victory will be within reach – it just may not be quick and may require patience.

Of course, it’s possible that the company will have a hard time training its massive employee base on new types of equipment, or the company may misidentify the brand. Overall, it could be a bumpy ride for a while. There’s certainly a case for strong long-term returns in Starbucks stock, but a high-quality Trefis portfolio could be a long shot if you find consistent outperformance at the top of your list.

It’s helpful to see how his peers are doing. SBUX Peers shows how Starbucks stock stacks up against peers on important metrics. You’ll find other useful comparisons of companies across industries in Benchmarks.

While investors are keeping their fingers crossed for a soft landing for the U.S. economy, how bad could things get in the event of another recession? Our ‘How Low Can Stock Prices Go During a Market Crash’ dashboard shows how key stocks have performed over the last six years and beyond market collapse.

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