Starbucks Corp (NASDAQ:SBUX) Earnings Model
Author: Reynaldo Garnanda Published: July 28, 2023
Thoughts From the Model Developer: I believe there is a shift in consumer behavior. I think one of main growth drivers is driven by the increasing preference for cold beverages especially among Gen Z and Millennial consumers. two-thirds of the beverages served by Starbucks in the US today are cold beverages. In my opinion, there is a growing trend among Gen Z and Millennial customers gravitating towards personalized cold beverages with plant-based ingredients. These beverages are frequently viewed as upscale. These younger consumers often enhance their drinks with additions like cold foams or plant-based milks, thereby enriching the overall premium experience. Lines impacted/directed: North America Segment, increase average revenue per store by 6% for F3Q23E & F4Q23E to in line with the higher-end management guidance and increase by 8% for the next eight quarters to reach management guidance range of 10-12% by fiscal 2025. I think Starbucks will beat the expectations given robust second quarter results will be expected to continue and management still simply reaffirmed its prior full-year forecast.
I believe efficiency through store investment is one of the main important drivers. Starbucks recently introduced their innovative "Siren System", significantly speeding up the process of making cold beverages. This, alongside the Clover Vertica machine, enhances drink quality and helps reduce preparation time for popular drinks like a Grande Mocha Frappuccino. As a result, Starbucks is able to increase its profit margins and attract more patrons. In the long term, strategic initiatives such as store upgrades, throughput enhancements, and automation offer compelling opportunities for Starbucks to become a leader and potentially exceed its planned margins. By focusing on improving service times and leveraging automation, particularly for mobile or drive-thru orders, Starbucks can enhance efficiency and better cater to customers prioritizing speed and convenience. Lines impacted/directed: North America Segment reduce opex as % of revenue and GAAP EPS. To reflect this opinion, the next two quarters store opex as % of revenue will be the same as last year since I expect the incremental investment in labor and technology will still headwinds against to margin expansion and I decreased store opex as % of revenue by 2% in FY2024E and expect margin remain constant throughout FY2025E. This impacted EPS growth to grow at management’s GAAP EPS guidance at the upper bound of around 20% until FY2025E.
China reopening path will be the tailwind for international segment. I believe the reopening will bring back travel and other forms of mobility that should benefit SBUX. Starbucks has projected an annual net new store growth rate of 13% in China from FY23 to FY25, with the expectation of reaching 9,000 stores by FY25. I incorporated this expectation to an implied around 10% growth into total international stores growth until fiscal 2025.
Market Multiple Valuation Description: I think Starbucks should trade at PE multiple of 28x, which is near the high NTM PE ratio. This implying my bullish view on Starbucks driven by 3 factors; 1) tailwinds as China reopens 2) increased investment in labor and operation to increase efficiency, and 3) shift in consumer behavior primarily Gen z and Millennial to a premium experience. My twelve-month price target is $114 derived from a 50/50 valuation of the multiple and DCF valuations, which resulted in price target of $108 and $119 respectively.
Disclosure: The author of this article/model has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in the content represent the author’s opinions.