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Sangara Narayanan
Sangara Narayanan
Articles (504) 

A Great Opportunity Awaits Starbucks Investors

With the stock down, a window of opportunity has opened for long-term investors

August 10, 2017 | About:

Over the past several weeks, Starbucks Corp. (NASDAQ:SBUX) pared all the gains it had made in the last year as the company missed analyst estimates for the third quarter of 2017 and lowered guidance for the second time this year. The sharp response from the market can be clearly seen as the stock price swung from its 52-week high of $64.87 in early June to its current level of $54, which is less than 10% away from its 52-week low of $50.84.

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The problem started after Starbucks announced its third-quarter earnings. The company posted earnings per share of 55 cents and revenue of $5.66 billion, meeting earnings estimates of 55 cents but missing revenue expectations of $5.75 billion.

Chief Financial Officer Scott Harlan Maw updated investors on the company's guidance during the third-quarter 2017 earnings call

"We now expect results a bit lower than our previous guidance, given the choppiness we saw in Q3 and are seeing in early Q4," Maw said. "Specifically, we now expect revenue growth to come in at the low end of our previous guidance range of 8% to 10%, excluding one point of FX and two points of impact from the 53rd week in fiscal 2016.”

The lower-than-expected revenues, along with the company’s lowered guidance for the rest of the year, took a heavy toll on sentiment and, naturally, investors started fleeing Starbucks, leading to a sharp decline in the stock's price over the last two weeks.

U.S. comparable store sales remained in the less than 5% range in the first three quarters of the current fiscal, much lower than the 7% level Starbucks used to regularly manage in the past, weighing on the stock.

But the recent drop does open a nice window of opportunity for investors to load up on Starbucks. While recent events were a huge disappointment for investors, that does not mean one average year of performance is going to hurt Starbucks’ long-term future.

The company has established its presence in 75 countries, is nearing store count of 26,000 around the world and has plans to reach 37,000 stores by 2021. Despite the size of its footprint, Starbucks was able to grow its comparable store sales by 3% during the first three quarters of the current fiscal. The amount of room Starbucks has to increase its footprint is huge and will provide a long runway of revenue growth for the company over many more years.

As a premium coffee house chain, Starbucks has no direct competitor, or at least none that have managed to reach its size and scale. It has already proven its product can cut through many borders and cultures, and that is not an easy task for large chains. Every major restaurant chain around the world would love to be an international player of repute, but only a handful manage to do so because having a product that can cater to the tastes of many different cultures is not easy.

Starbucks has achieved that status with a proven product. The recent price decline was a knee-jerk reaction by short-term investors. With Starbucks' long-term growth prospects remaining as good as ever, investors should load up and make use of this opportunity.

Disclosure: I have no positions in the stock mentioned above, and no intention to initiate a position in the next 72 hours.

About the author:

Sangara Narayanan
Sangara Narayanan holds an MBA from Kent State University, Ohio, and has worked on the floor as a trader in New York. You know where. He is passionate about capital markets and specializes in business analysis, stock valuations and making chicken curry

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