Starbucks Corp. (SBUX, Financial) is ready to return to the good old days of strong revenue and earnings growth.
That's according to a rosy forecast provided by the company's management in an analyst day last week. For 2021, Starbucks reiterated its GAAP earnings per share range of $2.34 to $2.54 and non-GAAP earnings range of $2.70 to $2.90 (both inclusive of a 10-cent impact attributable to the 53rd week).
Wall Street seems to share management's enthusiasm. The company's shares have gained 21% in the last three months, compared to the S&P 500's 10% increase.
Starbucks' optimism for 2021 and beyond came as a surprise to Quo Vadis Capital President John Zolidis, however.
"We continue to hold SBUX in high esteem and believe it is among the best consumer brands and most compelling global growth stories out there," he wrote. "However, in an environment where the majority of consumer companies don't feel comfortable providing guidance from now until the end of the year, we were shocked to hear SBUX calibrating its outlook two, three, and even four years into the future."
Still, Starbucks' management has a reputation for delivering superior returns, as evidenced by double-digit economic profit, which is the difference between the return on invested capital and the weighted average cost of capital.
This means the company has been creating value as its sales grew over the last decade.
Thus far, Starbucks' superior results have been attributed to its business model- the so-called "third place," an "affordable luxury" away from work and home.
That's a model others have tried to emulate over the years but never managed to beat.
Meanwhile, Starbucks has enjoyed the "early mover" advantage that allowed the franchise giant to acquire the best locations at home and abroad.
Another factor is innovation. Starbucks has constantly been introducing new drinks that have kept the hype alive for the brand. But the company's model has been shattered under the Covid-19 pandemic lockdowns and stay-at-home mandates worldwide, which have undermined its performance. As of Dec. 12, Starbucks' economic profit was -0.43%, down from the high upper teens recorded in the previous decade.
Starbucks' management expects conditions to improve, however. In a statement released last week, Chief Financial Officer Patrick Grismer said:
"Today, we reaffirmed our FY21 guidance and updated our ongoing growth model, guiding to a more explicit range of non-GAAP EPS growth. While the pandemic temporarily disrupted our business, our Growth at Scale agenda has provided the focus and discipline to deliver more consistent operating results. This agenda is as relevant today as when it was introduced two years ago. Underpinned by superior brand positioning and compelling unit-level economics, we expect our global retail store base to reach approximately 55,000 units in FY30, reaching more customers with a premium Starbucks experience."
That's music to the ears of Starbucks investors, who have pushed the company's valuation well above its fundamental value. Starbucks shares, currently at $103, trade well above the Peter Lynch earnings line and GF Value of $78.38.
These valuations give investors no margin of error if Starbucks' performance falls short of management's rosy outlook.
Zolidis, a long-time bull on the company, recommends that investors trim their positions at this point. Gurus are divided, with 11 adding to their Starbucks positions and nine reducing in the last three months.
Disclosure: I own shares of Starbucks.
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