Regular or Decaf?

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Click here to see how this ‘transformation’ will play out – and what it means for your money.

With nearly 35,000 stores, no one does coffee better than Starbucks (SBUX). 

During its most recent investors’ day conference the company announced a new CEO and a plan to supercharge its growth over the coming years. 

Financial pros took notice, making it the number searched coffee stock over the last month. 

Year-to-date, shares are down more than 23%. And a likely recession looms large over the company.

So far, they’ve managed to find pockets of growth by expanding their food offerings.

But is all that’s left decaf?

Starbucks Business

Starbucks (SBUX) is widely regarded as the premier specialty coffee shop in the world. 

It owns and operates Starbucks, Teavana, Seattle’s Best Coffee, and Evolution Fresh. 

The majority of its revenues come from its coffee shops. SBUX breaks down its revenues by company-operated stores, licensed stores, and “other.” 

At the end of Q3, stores in the U.S. and China comprised 61% of the company’s global portfolio, with 15,650 stores in the U.S. and 5,761 stores in China. 

51% of its stores are company-operated, and 49% are licensed. 

The company has sought to deepen its relationships with customers through its Starbucks Rewards loyalty program in the U.S. with 27.4 million active members. 

And despite economic headwinds, the company delivered record-breaking revenue in Q3 2022. 

Financials

From 2016 to 2021, SBUX increased its revenues by 26%, going from $21.3 billion to $29 billion.  

Its latest quarter was its best ever for sales. 

However, the firm withdrew guidance, even though 2022 will likely be a record year. Its 12-month trailing revenues stand at $31.98 billion.

One thing that concerns investors the heavy debt the company carries.

While the firm has $3.2 billion in cash, it’s debt load is a whopping $23.9 billion. 

The 0.84x current ratio is not great. But the firm did raise its quarterly dividend to $0.53 per share.  

Much of the debt is tied to its property and assets which total $14.4 billion after depreciation.

Valuation

SBUX trades at a P/E GAAP ratio of 25.3x, notably lower than its 5-year average of 49x. 

The closest rival to SBUX is Dunkin Brands, now a private company. While it doesn’t have direct competitors, several companies make and/or serve coffee, like Restaurant Brands International (QSR), which owns Tim Hortons and has 20.47x P/E ratio, McDonald’s (MCD), which serves the McCafe and has a 28.88x P/E ratio, Keurig Dr. Pepper (KDP), which has 30 different coffee brands and a P/E ratio of 24.44, and Nestle (NSRGY), which makes Starbucks Coffee at Home along with many other brands. NSRGY has the lowest P/E GAAP ratio from the group at 17.6x.

SBUX has a price-to-sales ratio of 3.2x, significantly better than its 5-year average of 3.9x. It’s right in line with NSRGY, but better than MCD at 7.5x, and KDP at 4x. QSR has the lowest price-to-sales ratio at 2.79x.  

Profitability

SBUX has a gross profit margin of 27%, which is notably lower MCD at 55.2%, KDP at 53%, and NSRGY at 46.6%.  

MCD operates at an impressive 25.7% net income margin, while SBUX is at 13%. Moreover, at an EBITDA margin of 19.8%, SBUX does not stack up well against MCD at 51.1%, QSR at 35.8%, or KDP at 26.9%. 

Growth

SBUX has seen its revenues grow by 17.9% (YoY), which is significantly greater than MCD at 8.5%, QSR at 13.6%, and KDP at 8.9%.

Moreover, SBUX has experienced an EBITDA growth of 16.6%, much greater than the rest of the group, with NSRGY being the closest at 9.3%. 

Our Opinion 8/10

SBUX recently announced a new CEO and has put together its reinvention plan to accelerate earnings by 15-20% annually over the next three years. 

Shares are down 23.61% year-to-date. But investors should be scooping up shares on dips. 

It is the leader in its category and is in a business that faces less uncertainty than most. 

While technology may change five years from now, people will still be drinking coffee. We like Starbucks and would be a buyer of dips.