While Starbucks Corp. (SBUX, Financial) has had a somewhat bumpy ride over the last year, the current dynamics call for a second look. The recent layoff announcement has unnerved investors, but it is not much to sweat about since the coffee chain is doing several things right.
As evidenced by its loyalty program, it is clear that Starbucks understands the importance of customer loyalty and of increasing repeat sales and customers. According to a ClickFox survey, 54% of respondents said they would increase their consumption of a certain brand for a loyalty-based reward, which indicates the company may see growth in its membership count.
In a recent filing, Starbucks said it serves around 85 million customers every week, of which around 18% have registered for the loyalty program. This leaves massive room for growth. Moreover, the company currently has around 28,720 stores worldwide, which is expected to increase as it expands its presence in China.
As part of that initiative, the company has joined forces with Alibaba (BABA, Financial) to broaden its delivery service offerings after facing troubles with third-party delivery agencies. Moreover, the company also inked a deal with UberEats in over 100 locations in Miami to test its delivery demand and use case.
The company is also innovating its menu. As it sees relatively slowing demand for its famous drinks, it is introducing new items to combat competition from regional players. Moreover, another major positive for the company is declining raw material costs as coffee futures fell to multiyear lows.
From a fundamental standpoint, the company has not posted mind-blowing numbers. Its same-store sales grew a mere 1% in the July quarter, as compared to expectations of 3% growth. In order to combat this slowdown and encourage product innovation, Starbucks is aiming to make processes smoother by changing the way the top level of the organization functions.
As Starbucks prepares for its corporate layoff, investors are bracing for impact. In a statement, CEO Kevin Johnson emphasized the importance of innovation and leadership in staying ahead of competitors, saying the changes will start taking effect this week and continue through November.
Starbucks also recently announced it plans to open 10,000 eco-friendly stores across the globe by 2025, which will lower the water usage by 30% and energy by 25%.
Additionally, Johnson said the company plans to buy back $25 billion worth of shares by 2020, of which $5 billion has already been returned to shareholders.
From a valuation perspective, the stock appears to be undervalued. The price-earnings ratio of 18.07, which is below the industry median of 25.91, reaffirms the stock's long-term value. Moreover, it has an operating margin of 15.87%, compared to the industry median of 5.08%, helping it score an 8 out of 10 profitability and growth rating from GuruFocus.
While the layoffs did raise a few eyebrows, Starbucks appears to be in a great position fundamentally. Moreover, we might be seeing a November earnings beat given employee expense savings and increasing consumer spending.
Disclosure: I do not own any of the stocks mentioned.
