Starbucks' Price Offers Attractive Entry Point

Same-store sales of just 3% in the U.S. are grabbing the headlines following

Based on our discussions with Starbucks store employees and other restaurant executives, we view as valid management’s claims that increased Mobile Order and Pay, or MOP, usage—which makes up 7% of transactions at U.S. company-owned locations, versus 3% a year ago, and 20% of transactions during peak hours at more than 1,200 locations--led to congestion and throughput bottlenecks. Still, we’d much rather have a situation where demand outpaces capacity, as it not only lends credence to the brand intangible asset behind our wide moat and tends to be more easily corrected than other issues. We’re confident that management has the expertise to develop solutions in the interim (adding more baristas at the ticket station and the handoff point) and in the longer term (designing new restaurants with stand-alone MOP stations).

On top of congestion solutions, we believe Starbucks Reward Card loads (which increased 15% to $2.1 billion in the quarter, or almost 10% of our expected revenue outlook for the year), personalized marketing, and other tech innovations like "My Starbucks Barista" voice-recognition technology will help Starbucks reach its full-year target--including mid-single-digit comps and 8%-10% revenue growth for the year, despite a likely uneven U.S. retail traffic landscape. There is no change to our $66 fair value estimate. Our 10-year forecast, calling for 10% average annual revenue growth and consolidated operating margins of 24%, remains intact, and we believe the market price offers an attractive entry point for one of the most dynamic growth stories in the consumer space.

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