Starbucks Corporation

SBUX Details

Starbucks Corporation (NASDAQ: SBUX) is a well-known restaurant brand globally, with almost 34,000 locations in over 80 countries as of the fiscal year 2021. North America, overseas markets, and channel development are the three segments in which the company works (grocery and ready-to-drink beverages). Company-operated locations, royalties, sales of equipment and goods to licencing partners, ready-to-drink drinks, packaged coffee sales, and single-serve items are all sources of revenue for the coffee business.

Latest News:

• Acquisition of Bolthouse: On May 24, 2022, Starbucks and Bolthouse Farms today announced entry into a definitive agreement for Bolthouse Farms to acquire the brand and business of Evolution Fresh. Evolution Fresh is a leading producer of primarily organic, cold-pressed, premium juice products. By joining forces with Bolthouse Farms - the No. 1 super premium refrigerated beverage brand and largest carrot supplier to North American retailers1 - Evolution Fresh will have the opportunity to accelerate its growth trajectory while Starbucks focuses its efforts on the growth of the core Starbucks business and its partner and customer experience.
• Opened 313 New Stores Q3FY22: In Q2 FY22, the company opened 313 net new stores, ending the period with 34,630 stores globally: 51% company-operated and 49% licensed
• Paid Quarterly Dividend: On May 03, 2022, the board has approved quarterly dividend of USD 0.49/share payable in cash on May 27, 2022, to shareholders of record on May 13, 2022.

Q2 FY22 Results:

• Increase in Global Comparable Sales: The company reported a 7% increase in Global comparable store sales, mainly on account of 4% increase in average ticket and a 3% increase in comparable transactions.
• Top-Line Growth: During the quarter under consideration, consolidated net revenues up 15% to a quarterly record USD 7.6 billion, supported by a 17% jump in the North American market’s net revenue and a 4% increase in international markets sales.
• Decent Bottom Line Performance: The company's net income attributable to Starbucks in Q2 FY22 was USD 674.5 million, up from USD 659.4 million in Q2FY21, a 2.4%. However, bottom line is not broadly inline with the topline performance mainly because of 17% surge in the operating expenses which was majorly affected by a 23.8% surge in the Product and distribution costs.

Key Risks:

The company is exposed to a variety of risks ranging from increasing raw materials prices in the wake of inflationary pressure, margin suppression, supply chain disruption due to geopolitical issues, Worker’s Union related problems, forex risks, competition risks and other macro-economic risks.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

SBUX’s share price has decreased by ~31% in the past six months and is currently leaning towards the lower end of 52-week H/L range (High of USD 126.32 to Low USD 68.39). We have valued the stock using the EV / Sales multiple based relative valuation methodology and arrived at a target price of USD 86.82.

The company is single-mindedly focused on enhancing its core U.S. business through its partner, customer, and store experiences. Given record demand and changes in customer behavior they are accelerating their store growth plans, primarily adding high-returning drive-thru, and accelerating renovation programs so they can better meet demand and serve their customers where they are.

From the technical analysis standpoint, SBUX stock has registered a break-out above 21-day EMA after May 04, 2022, on daily price chart with decent volume, a bullish indicator. Also, the leading momentum indicator, Moving Average Convergence Divergence (MACD) is rising and hovering above 9-day SMA Signal line, implies bullish momentum. The 14-Period RSI is also hovering in a neutral zone with bullish bias at 52.83.

Hence, considering company’s moderate performance in the quarter just gone, bullish technical indicators and current valuation. We recommend a “Hold" rating on the stock at the closing price of USD 76.71 as of May 27, 2022.

1-year technical chart as of May 27, 2022, Source: REFINITIV. Analysis by Kalkine group

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.

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