Starbucks Is Making the Right Investments

Wide-moat Starbucks SBUX reported mixed fiscal fourth-quarter earnings, led by comparable store sales strength in the newly christened North American segment, a sharp improvement in operating margins (largely attributable to base effects), and sustained growth in premium cold beverage platforms. Unit growth remained robust, with particular strength in China (up 13.9% annually), and the aggregate international segment (8.2%), while strong loyalty program uptake (24.8 million active members in the U.S., up 30% year over year, and 17.9 million in China, up 33%) should continue to drive comparable store sales momentum. We maintain a positive view of management's approach to increasing partner wages (a crucial investment to fully staff stores and compete for market share) and channeling capital toward store technology and kitchen equipment. Nonetheless, these investments pose a 400 basis-point margin drag in the near term, leading us to maintain our $109 fair value estimate as time value of money, wage investments, and sustained market share gains offset--leaving shares looking fairly valued.

Commentary on the labor market shortage and commodity inflation struck us as interesting, with the firm working to add manufacturers and supply chain partners to avoid outages in high-turnover stock-keeping units, like oat milk, breakfast sandwiches, and egg bites. Repercussions of wage inflation have echoed throughout the value chain, with Starbucks purportedly working with vendors to invest in upstream wages, while relying on driving in-store automation to defray pressure on restaurant margins (down about 280 and 270 basis points sequentially in the North American and international segments, respectively). Moving forward, we expect automated ordering platforms, kitchen equipment, and restaurant tech to focus on reducing labor hours per transaction moving forward, with the largest, best capitalized operators likely to continue to capture the bulk of the industry sales recovery.

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