About Starbucks
Truth be told, I don’t think I could care any less about Starbucks.
I mean truly.
No offense, but I just don’t get it, and I think this is largely due to the fact that I’m not a coffee drinker (at all), and I’m one of those weirdos that is far more inclined to consider owning shares of the company through its stock than investing in a festive coffee or tea, only to get a sugar rush and sizable debit in my checking account in return.
Also, I will be brutally honest and admit that I don’t have the fondest of memories with my local Starbucks, as back when I was side hustling through DoorDash, every single time a Starbucks order would pop up on my phone, it would trick me every single time in that the money-to-mileage ratio was just splendid (think somewhere in the ballpark of $6.50 for a single mile of driving), however, when I arrived at the store to pick up the order, I could always count on it being ridiculously busy, and I’d have to wait for at least fifteen minutes before there was even a sliver of hope of me retrieving John T.’s frappe and cake pop.
Now don’t get it twisted; I am not by any means hating on the fine folks who work at Starbucks, because frankly anyone who says that being a barista is an easy job, you are just so wrong it’s not even funny, but all I’m saying is that maybe Starbucks’ corporate team ought to consider setting up a better designated pick-up station for the sakes of both employees and Dashers, so as to make the process a bit easier, quicker and smoother.
Speaking of the higher-ups at Starbucks, the company recently experienced some corporate officer restructuring, with the company’s short-lived chief executive Laxman Narasimhan being removed from his post and replaced by one of the greatest contemporary executives within the dining sector, former chief executive officer (CEO) of Chipotle Mexican Grill, Brian Niccol, who might I also add is being rewarded with a very handsome $113 million pay package, including the privilege of working remotely, hundreds of miles away from the company’s headquarters in Seattle, Washington, and when he does take the occasional trip to HQ, he will also have the luxury of using the company’s corporate Gulfstream G550 airplane, which is an awesome perk of his contract, to say the absolute least.
All of this to say Niccol really does have a remarkable track record and under Narasimhan’s leadership, the company wasn’t really going anywhere nor performing at the rate it should’ve been, especially being that it is indeed such an iconic brand, not only domestically, but overseas as well. Given what Niccol was able to do with Chipotle, I think shareholders have a lot to be optimistic about, with Starbucks’ stock price (NASDAQ: SBUX) already up around 25% upon the announcement of Niccol’s onboarding.
While this was a significant event, it is the past and I must concentrate on not only the mere present, but the future, particularly in the context of cycles as it relates to Starbucks. In doing this, I’ll briefly point out that if you’ve been reading any of my more recent stock analysis articles, you know where I think interest rates are headed and the market largely with that, but I’ll still offer some insight.
First and foremost, although most rational beings would categorize Starbucks as a “consumer discretionary” enterprise, I think this is technically true if you’re in the business of pigeonholing and not embracing the fact that hardly anything is black and white, but I’m not in that business and upon considering simply my own experiences with those around me on a daily basis and those I merely observe when I am about out and about, I’d contest the notion that Starbucks is something that people just splurge on when their bank accounts are fat and happy. In other words, it isn’t as discretionary as one might think, and given the combined forces of the addictive nature of coffee and the brand power of Starbucks and the clout that comes with holding a cup with that green and white wavy face on it (no, I’m serious), many might be surprised as to just how much consumers prioritize their Starbucks in relation to their other, more objectively pressing expenditures. Yes, spending will more than likely slow and comparable store sales might experience some softening during recessionary periods, however, all I am saying is that I think Starbucks is more recession resistant than not, especially ever since it integrated its operations with third-party delivery app platforms such as DoorDash and Uber Eats, among other positive, more customer-friendly initiatives.
Clearly, all of this bodes well for the company, especially in times of economic softening and consumer budget tightening, especially since Starbucks’ drinks tend to be marked up quite handsomely in the first place. Zooming out and considering more cyclical, broader considerations, with rates coming down in recent history, this has been a general positive for companies with large real estate footprints (Starbucks is obviously no exception), but given my opinion(s) surrounding the Fed needing to pivot back into higher rates, in being as forward-focused as possible, higher rates could inhibit store growth and its ability to finance other growth initiatives, which it is indeed in need of, and while I won’t be turning back on my consumer comments, this company is obviously not recession proof and consumers, although they might still be intent on getting their coffee fix, might elect to trade down if (I think “when” is a more appropriate word) the tide turns and they end up making less frequent and customized purchases.
Another macro factor to weigh is its sensitivity to the commodity price of coffee beans, which is a historically volatile commodity, but since the beginning of 2024, arabica coffee futures have increased to the tune of 50.61%, which is actually a net-positive for a company such as this one, as it is the case with most other commodity-centered companies that are in upcycles that they can often widen their margins, especially with its loyal, largely price inelastic consumers. Still, like most other commodity-subjected companies, Starbucks employs hedging for both upward and downward cycles, allowing them to lock in coffee prices well in advance, in order to stabilize costs. If anything, it’s largely a consideration and a dynamic to be understood, especially when coffee prices drift back down. For some context, for those that are interested, one of the main drivers of this recent and rampant price increase stems from a continued coffee supply deficit, which has been present for the last three consecutive years, pushing prices higher, also propelled by ongoing reduced soil moisture levels in Brazil, which happens to be the world’s largest coffee producer.
In adding to this equation, global coffee demand has continued to steadily rise, growing at a rate of 3.4% annually since 2018.
It’s sort of the perfect commodity storm in terms of increasing margins, but this trend won’t last forever, but given my rather extensive research surrounding the next 18-24 months (which are obviously subject to change), supply issues aren’t likely to subside due to forecasted hot and dry conditions in Brazil, another forecast being a persistent supply deficit, and there’s also been in a delay in the implementation of the European Union (EU) Deforestation Regulation, further tightening the market by curbing supplies in countries like Brazil and others in the area. Namely, given Europe’s new mandate that coffee producers have to prove that their coffee didn’t come from deforested regions, less potential supply coming from regions in South America and some Asian ones as well, into Europe, adding to the prevailing supply constraint and inherent price increase.
I also feel that the overall currency landscape is important given just how much of a global presence Starbucks maintains. Primarily, over the next 18-24 months, the USD is forecasted to maintain its growth trajectory in terms of the strength it’s been garnering by virtue of the anticipation of President Trump having a second term in Office, but also with the United States’ robust growth, low unemployment, the current spurt of winding down quantitative tightening (QT) projected to conclude in early 2025, and the prospects of the Federal Reserve continuing to “tame” the economy and inflation through continued, soft rate cuts leading into 2025.
A strong USD isn’t usually the best for an international company like this one, as it means that the revenues it generates in countries and regions with a comparably weaker currency, when repatriated back to the USD, come back lesser in amount given the unfavorable exchange rate, not to mention that their products tend to be more expensive for consumers overseas, perhaps in some cases leading to softening in demand. Again, this concern isn’t at the top of my list right now, but it is something every prospective and current shareholder should keep tabs on.
For a little more background on the company itself, Starbucks, founded in 1971 by visionary entrepreneur Howard Schultz, is frankly one of my favorite entrepreneurs of all time because his story is one of grit and hustle. The guy approached 242 potential investors and was passed by 217 of them, maintaining a failure rate of around 90%, and he still founded one of the world’s most treasured, iconic brands.
Don’t you ever tell me that America isn’t the land of opportunity with a straight face.
Since its founding, Starbucks has grown to be the world’s most popular and adored coffee shop, with north of 36,000 locations across a whopping 83 countries, and might I add that the brand power is strong with this one.
However, as is the case with many other large companies, Starbucks does have a very large target on its back, as it has been enduring complications with its labor force for many, many years, where employees actually have or vehemently threatened to unionize, which is obviously not a situation any large company looks to find itself navigating.
Thankfully, things have been rather tame in more recent months and years, however, it would be borderline absurd if I didn’t briefly bring this into the picture, as this sort of activity can indisputably have impacts on its business and operations worldwide.
I’ll also point out that while it is understandable to believe that Starbucks only derives its revenues through selling coffee and some food in its stores, many forget that it also has a consumer packaged goods (CPG) division, selling products through major retailers, plus, in addition to its company-operated stores, Starbucks also has licensed stores, adding to its top-line through royalties and product sales from third-party operated locations. A perfect example of this is how at my university, we have a handful of coffee shops that, in terms of products and items sold, are the exact same as those found at any other Starbucks (the same cups, logos, flavors, menu, etc..), but they are just university-branded, called something like “Longhorn Coffee.”
While this all might’ve seemed like a lot of information, it is also essential information for all of the real investors out there, and don’t you worry, real investors, as I have a lot more where that came from.
Let the financial analysis really begin.
Starbucks’ stock financials
Being the large and in charge company that Starbucks is, it makes sense that it has a sizable market capitalization (or net company valuation) of $107.17 billion, and it would also be wise to initially include the facts that the company has a present stock price of $94.57 and a directly associated price-to-earnings (P/E) ratio of 26.5 while also paying out an annual dividend to its shareholders in the amount of $2.27, all giving us a pretty intriguing base to jump off of, as the company’s stock (NASDAQ: SBUX), according to its present price-to-earnings ratio, is mildly overvalued, standing a few points over the commonly held fair value benchmark of 20 and it can also be seen that the firm offers a nice little dividend for shareholders, which I assume it can afford to pay out, but I’ll verify (largely through the company’s cash flow statement and other metrics) a bit later.
While shares are a little overvalued at the moment, perhaps the company is growing at a swell enough rate that would rationalize paying the mild premium that someone would apparently be forced to pay if they wanted a piece of the Starbucks empire right now.
As we move right along towards the company’s balance sheet, Starbucks’ executives are tasked with handling and strategically deploying $31.3 billion in terms of total assets and $38.7 billion in terms of total liabilities, which is definitely not the outcome I was hoping for nor was initially expecting, as the company has an upside-down balance sheet (i.e., more total liabilities than assets), however, this is a great example as to why context matters and that any investor who elects to take these numbers at face value and not further investigate ought to not consider themselves investors at all, but a sloth.
The root cause of Starbucks’ upside-down balance sheet is its stock buybacks over time, resulting in its shareholder equity being negative (in the amount of $7.4 billion per its latest annual report), which should be a point of solace for readers and potential investors since the current liability-heavy state of its balance sheet isn’t due to a slew of liabilities and poor debt management, but consistent and sizable stock buybacks. Putting this to the side and learning more about the company’s actual, perhaps slightly more meaningful debt levels, Starbucks has an interest coverage ratio of 12.2, directly indicating that its earnings before interest and taxes (EBIT) can cover its interest expenses, well, you guessed it, 12.2 times over, not to mention that the company produces a more than solid amount of operating cash flow, to the tune of 41.7%, another means of protecting itself from finding itself in financial hot water.
On the basis of the company’s income statement, Starbucks’ annualized revenues stemming from and between 2020 and 2024 (reported in late September this year) have been growing each and every year, expanding more in certain years than others, basing out at $23.5 billion in 2020 and leading up towards its latest reported revenue figure of $36.1 billion, as reported in September. I am glad to see this sort of consistent growth coming out of this company, and it appears as though some of the specific reasons this growth has been so charged falls within a few different categories. To name a few of the main drivers, its brand power, its digital adoption, and it has continued expanding its store count globally.
I can’t complain.
Regarding its cash flow statement, Starbucks’ total cash from operations during the same time period have been emblematic of a few different things, none of which were unexpected. Namely, its total cash from operations in 2020 were a hair under $1.6 billion, solidifying itself well as a relative low (when else but COVID?), but grew back to more proper form in the following years, tracking up to $5.9 billion in 2021, just about $4.4 billion in 2022, and $6 billion in both 2023 and 2024. The southbound bump between 2021 and 2022 can be attributed to the higher operating expenses incurred by the company during this era, primarily relating to labor costs, disruptions in the global supply chain, and recessionary pressures.
Still, the company was able to generate a serious amount of total cash from its operations amidst these bouts of turmoil, giving me some historical, fact-based confidence that it will be able to continue holding its ground when rates come back up.
Starbucks’ stock fundamentals
Sure, Starbucks is the leader of the global coffee pack, but competition has been heating up like some hot brew, with regional and national competitors such Dutch Bros, Caribou, Dunkin’, Luckin, and all of the other chains looking to nip away at Starbucks and its value propositions, but even though this is shaping out to be an more competitive industry than I initially presumed, its comparable net profit margin has held up quite nicely. In terms of specifics, Starbucks’ net profit margin is pegged (on Charles Schwab’s platform) as 10.40%, whereas publicly traded competitors like Dutch Bros reporting net profit margins of 4.72% and its biggest Chinese competitor, Luckin Coffee, with a net profit margin of 7.48%.
Should you buy Starbucks stock?
I’ve learned a lot about this company as well as the industry it operates within and even the center-stage commodity it deals in.
In terms of the company, through the lens of its balance sheet, revenues (income statement), ability to generate cash (cash flow statement), net profit margin and less quantifiable aspects like its global brand recognition, customer loyalty, and the base of (largely) price inelastic Starbucks maniacs that will go to great lengths and pay hefty prices to hold a Starbucks-branded cup of joe.
In addition to appreciating its comparably fortified net profit margin, the prevailing trends in terms of the price of coffee as a tailwind that seems to be unabated, as both the supply and demand dynamics are playing well for this company in terms of pricing, and with reference to the aforementioned as well as other forecasts, these supply restrictions and growing demand for coffee aren’t likely to wane materially within the next 18-24 months.
When also throwing a new CEO into the fold that did nothing short of a remarkable job at leading Chipotle to the heights it has attained today, future results are far from ever being guaranteed, but it is hard to imagine Niccol not getting Starbucks out of its past CEO’s funk and into a better future.
Hence, the “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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