The Starbucks stock price has fallen by over 11% in the last month to trade at its lowest level in over three years. Investors have responded negatively to news of the departure of Executive Chairman Howard Schultz. He will leave the company by the end of the month.
In addition, the business reported that slowing same-store sales growth is now expected in the third quarter. Alongside this, it will increase the rate at which it closes underperforming stores, in a sign that the U.S. market may be becoming saturated.
However, with growth potential in China, as well as the potential impact of the recent Nestle deal and the gradual move into Roasteries and Reserve stores, the prospects for the business could be impressive. After its recent stock price fall, a value opportunity could be on offer.
China growth potential
China continues to represent a significant growth opportunity for the company. Over the five years to 2023, the country is expected to see its middle class double in size to 600 million. Already, the company has 3,100 stores in the country, so its plans to open a further 500 stores per year are unlikely to mean it reaches saturation point. Given that it has nearly 14,000 stores in the U.S., there could be strong growth ahead for the company in the region over a prolonged period.
Encouragingly, Starbucks has delivered 33 consecutive quarters of same-store sales growth in China. This suggests that there could be further growth ahead, with the brand becoming increasingly popular among Chinese consumers. The company’s loyalty program saw its member base rise by 17% in the most recent quarter, which suggests that brand awareness and loyalty continue to increase.
Growth initiatives
Alongside the growth potential in China, Starbucks’ financial performance could be boosted by the recent deal with Nestle. The company will receive $7.15 billion, with Nestle acquiring the rights to market, sell and distribute Starbucks brands. This provides the company with greater global exposure, since Nestle has global distribution in 191 markets versus Starbucks’ 76. And with the consumer packaged goods business being a potential brand amplifier, it could strengthen customer engagement. This could lead to higher traffic to the company’s stores.
Additionally, the business is seeking to increase its revenue by investing in its Roastery and Reserve stores. They provide premium products and will be situated in major cities across the world. There are plans to build up to 1,000 Reserve stores, while Reserve bars could be added to one-fifth of stores.
Potential risks
Of course, the departure of Howard Schultz on June 26 could cause volatility in the company’s stock price in the near term. He re-entered the company as executive chairman following a 50% fall in its valuation during the financial crisis and is credited with reviving the fortunes of the business. On his watch, the company has prioritized growth in China, while also seeking to diversify into new growth areas, such as its premium Reserve stores.
Furthermore, there is a risk that the company has now reached saturation point in the U.S. Its recent update showed that same-store sales growth expectations have been cut from 3% to 1% for the third quarter. And with 150 underperforming stores set to be closed in 2019 (versus previous guidance of 50), the company appears to be undergoing a relatively challenging period in the U.S.
Outlook
While slowing same-store sales growth and the departure of Schultz are risks facing the business, the company could overcome them. In terms of boosting sales growth, Starbucks is focusing on expanding the breadth and depth of digital relationships with customers. It has added 5 million new digitally-registered customers since April 2018. It anticipates that digital initiatives could add one to two points of comparable growth in the U.S. alongside a redesigned reward program.
Additionally, the company’s CEO, Kevin Johnson, has been with the company since last year, and this may provide a more seamless transition upon Schultz’s departure. Furthermore, the new chairman, Mike Ullman, has a solid track record of performance at J.C. Penney. He led the company’s turnaround after a challenging period.
Investment potential
Clearly, the performance of the Starbucks stock price has been disappointing in recent trading sessions. Due to the risks ahead, it may experience further volatility in the near term. However, in the long run it seems to be well-placed to generate high growth from China, while its move into Roasteries and Reserve stores could catalyze its financial performance. Alongside this, its digital initiatives and the deal with Nestle could also provide catalysts for its share price in future years.
