Starbucks (SBUX, Financial) is one of the few companies you should buy and let sit in your portfolio.
During the third quarter the premium coffee chain met analysts’ expectations but comparable sales weakened, starting off media discussions about a slowdown in its growth story. Overall retail sales during the most recent quarter were a mixed bag with some companies reporting above average results and others going in the opposite direction.
But there are several reasons why you should hold this premium coffee chain in your portfolio as long as possible.
U.S. store growth is far from complete
Sales growth during the most recent quarter came in at 4%, much lower than the above 6% levels the company enjoyed in 2015, which was one of the things that sparked discussions of a slowdown. As a premium coffee chain any slowdown in the economy will indeed hit the company. This is not a recession-proof company but definitely one that can withstand many recessions. There is no competitor of scale and size to challenge Starbucks, and the company has fully entrenched itself in the lives of its customers.
But a slowdown is not a sign of things going downhill because there is still plenty of opportunity for growth inside the U.S.
At the end of the third quarter Starbucks had 4,952 franchisee stores and 7,559 company-operated stores in the U.S. With more than 12,000 domestic units Starbucks may not able to grow at the speed it did 10 years ago, but the growth story in the U.S. is far from over. The company opened 194 new stores in the Americas region this year with plans to hit 750 net new store openings over the next fiscal.
But it’s not just the home market that still holds promise for Starbucks.
Starbucks has a huge Chinese runway
China is one market that has been a huge problem for so many companies, but Starbucks has so far bucked that trend. During the third quarter Starbucks China had $768.2 million in sales, a growth of 17% compared to the prior period. The coffee maker had a total of 6,127 stores in this region, including 2,675 company-owned units;Ă‚ 2,500 more stores are on the books over the next five years.
Growing the store count by nearly 50% over a five-year period is bound to show up at the top line in a significant way and will ably augment Starbucks’ U.S. revenue moving forward.
In addition, there’s one more factor that makes this an appealing company from an investor’s perspective.
Starbucks’ balance sheet has always been strong
At the end of the recent quarter the company had $2.3 billion cash on hand and long-term debt of $3.2 billion. This is a company that has always kept its balance sheet as clean as possible. Considering the interest rate environment the company could have easily resorted to raising debt to buy back shares but has so far resisted the temptation and kept its books as healthy as possible.
Howard Schultz is only 63 years old
The 1953-born chairman and CEO of Starbucks is one of the most iconic CEOs in the corporate world. He was the primary architect behind the growth of Starbucks and continues to be the company's leader. He is only 63 years old, and there is plenty of time for him to stay at the top and oversee Starbucks’ next phase of growth into China and beyond.
All of these factors combine to make Starbucks one of the most resilient companies of its kind today. Despite the media noise that Starbucks is headed downhill, investors should be aware that growth is far from being over.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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