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Starbucks Poised for Post-COVID-19 Growth Acceleration

We see several ways that the company is positioned to take market share.

We expect investor sentiment on wide-moat Starbucks will start to shift away from the pace of its COVID-19-related recovery and instead focus on its post-pandemic growth potential following third-quarter results that matched its mid-June update and a relatively upbeat outlook for the fourth quarter and fiscal 2021. While it still lags many QSR chains due to morning commute disruptions and its experience-focused formats, we see several ways that Starbucks is positioned to take market share in a specialty coffee category that will likely be hit harder than many other restaurant subcategories.

First, it is finding ways to give consumers greater access. In the past, we've been constructive on plans to increase drive-thru and pickup locations in several key markets, but strategic initiatives such as digitally enabled curbside pick-up at 700-1,000 locations by the end of the fourth quarter will give consumers even greater access to the brand. Second, digital capabilities (mobile ordering, loyalty program, and delivery capabilities) have kept sales trends ahead of most small specialty coffee chains, a trend we expect to accelerate in fiscal 2021. Finally, because Starbucks continues to invest more heavily in its business than peers (employee wages and benefits, other COVID-19-related safety measures), we expect it will face fewer operating issues over the near term (even if profits lag sales in fiscal 2021, as CFO Pat Grismer pointed out).

Management's updated 2020 outlook calling for global comp declines of 12%-17%, an implied revenue decline in the low double digits, and adjusted EPS of $0.83-$0.98 per share appear realistic. However, based on increased confidence in future comp growth via access and digital initiatives as well as accelerating new unit openings, we plan to raise our five-year average annual revenue growth outlook to almost 9% (up from 8%). This will increase our $86 fair value estimate by $4-$5 per share, and we view shares as undervalued.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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