Starbucks’ (SBUX, Financial) less-than-optimal sales performance in the crucial North American market has caused the stock to trade in a tight $50 to $65 range for the last two years. The stock has been moving up and down within this band and, unfortunately for the company, it doesn’t look like a breakout will happen in the short term. But the real question is: Should investors make use of market sentiment to buy into Starbucks, which is trading close to its 52-week lows?
There are plenty of reasons why investors should consider adding Starbucks to their portfolios, but the most important one is the uniqueness of the brand. Starbucks is a premium coffeehouse chain. The company competes with several restaurant chains that also sell coffee, and some coffee chains as well, but no one is at a level comparable to the premium position Starbucks has taken in its niche market.
The second-most important reason is that Starbucks is an international brand. There is a reason why restaurant chains tend to get stuck with regional branding. It’s because becoming a national brand is not that easy, and becoming an international brand is even more difficult. Only a handful of companies have managed to garner global acceptance, simply because there are plenty of borders, cultures and cuisine preferences to break through before gaining that acceptance.
As a global brand Starbucks operates in more than 70 countries, compared to 119 countries in which McDonald’s operates. That means there is still plenty of room for Starbucks to grow internationally, and the company has already set its sights firmly on China. Starbucks has opened 1,056 stores there in the last year and plans to take its store count in the region to 5,000 by 2021.
Starbucks is also planning to take its overall store count to 37,000 by 2021, a significant growth number because Starbucks only had 26,736 stores by the end of the third quarter. To get to that number by 2021, it will have to open nearly 2,500 stores on average for the next four years. It looks difficult to achieve, but even if Starbucks gets close to that number, it will be a great achievement for the company.
Now, let’s take a closer look at what Starbucks did in the last four quarters. Starbucks finished the third quarter of the current fiscal with 26,736 stores around the world, up from 24,395 stores in the prior period, an addition of 2,341 stores in just one year. So it’s nearly there with respect to its internal targets. The breakdown of that figure: 1,002 additions in the Americas, 1,056 in China and 305 in EMEA and 22 store closures in other segments.
Judging by that momentum, the target of 37,000 stores by 2021 looks within reach. At the current rate, even if Starbucks is not able to achieve that number, it will likely get very close, which means revenue has plenty of room to grow in the medium term.
The market seems to be overly concerned about low single-digit comparable store sales in the Americas and keeps overlooking store growth prospects and the lack of global competition for the company.
No restaurant chain will be able to consistently keep improving the number of customers that walk into its outlets year after year. There will be times when things don’t go their way. Investors need to look for brands that will be able to withstand a slowdown and still march ahead.
Starbucks is a well-established international brand with plenty of room to grow because international revenue keeps its growth story intact, and it will give Starbucks enough time to get things back on track in the Americas segment. It could take time, but when that happens the stock price will have moved back to a higher valuation. If you are a long-term investor, it’s a great time to add Starbucks to your portfolio.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
