How Starbucks has picked up steam again

A year ago, the outlook for Starbucks Corp. seemed as flat as a day-old latte.

The giant coffee chain’s stock essentially had been dead money for three years running, trading around $52 a share just as it had in mid-2015, as investors saw little to cheer about.

Starbucks’ annual same-store sales growth — or sales at stores open at least a year, a key retail metric — had tumbled to 2% from 7% in that span. Same-store sales in China alone, where Starbucks has been aggressively opening thousands of outlets, fell slightly during last year’s spring quarter as competition grew.

And Starbucks’ management — led by Chief Executive Kevin Johnson, who took over two years ago from longtime CEO Howard Schultz — had produced quarterly results that sometimes fell short of Wall Street forecasts.

“There were a number of concerns about Johnson’s ability to lead this company,” Morningstar analyst R.J. Hottovy recalled.

It all seemed to indicate that the Seattle firm’s remarkable expansion of the last two decades, which put a Starbucks on seemingly every other block, had reached a saturation point, ending Starbucks’ run as a hot growth company.

Not so. Starbucks’ prospects and its stock took off again a year ago and, after the company posted another strong quarter Thursday, the stock has now soared 93% in the last 12 months, making it the biggest gainer in the Standard & Poor’s 500 index in that period. With a closing price of $99.11 a share on Friday, the chain now has a market value of $121 billion.

Starbucks, which had $24.7 billion in revenue in fiscal 2018, “is very much a growth company” again, analyst Nicole Miller Regan of Piper Jaffray said in a note to clients last month.

The chain, which has company-owned and licensed outlets, also continues to expand. Starbucks opened its 30,000th store in March and now has 30,626. (It had only 165 when Starbucks went public in 1992.) Nearly 3,000 of those outlets are in California, which accounts for 20% of its 14,600 U.S. stores.

What turned the tide? Analysts said several upbeat developments coalesced to improve Starbucks’ outlook and turn investors bullish again, including an expanded menu — with new drinks such as Nitro Cold Brew and Cloud Macchiato — pushing sales upward.

Starbucks also entered an alliance with Nestle last August under which Nestle distributes Starbucks’ packaged ground coffees, coffee beans and other products worldwide. The deal provided Starbucks with an initial payment of $7.2 billion and now a stream of licensing revenue.

The company’s three-year plan to return $25 billion to shareholders in the form of stock buybacks and dividends has also boosted the share price.

But two items stand out in Starbucks’ rebound, analysts said: The systems with which it cultivates customer loyalty — its smartphone app and rewards program — and its push into China.

Many retailers, from department stores to supermarkets, have mobile apps with which customers can place orders and fold the stores into their daily routines. Domino’s Pizza Inc., for instance, credits much of its success in recent years to its app.

Starbucks’ app is increasingly popular with its customers as well, enabling them to order and pay before they arrive, customize their orders, collect and redeem rewards points, find nearby stores and even identify the music they hear there.

The company has worked to streamline its app to drive higher visits and sales, juggled employees’ tasks to limit bottlenecks caused by in-store pickups of online orders, and tweaked its loyalty program to enable members to earn rewards faster than before.

“In the last year, we’ve reduced from seven to three steps to place an order” on the app, Patrick Grismer, Starbucks’ chief financial officer, told analysts this year.

Starbucks declined to comment for this story but pointed to public remarks by its executives, including that more than one-third of all transactions at U.S. Starbucks stores now are done with the mobile app. The company also says its “digitally engaged customers” buy two to three times as many products as those who don’t use the app.

“Customers are digitally savvy and expect higher levels of convenience,” Johnson told analysts Thursday, adding that an effective app produces “more frequent occasions, increased spend, improved customer retention and marketing efficiency.”

The growth of Starbucks’ Rewards loyalty program shows a sharp rise in people formally making the chain a regular part of their lives. There are now 17.2 million people enrolled in the program, up 30% from 13.2 million two years ago, and members accounted for 42% of sales in U.S. stores in the latest quarter, up from 36% two years ago.

Growth in China is also buoying the company. Starbucks now operates nearly 4,000 stores there with plans to reach 6,000 outlets in 2022, and it’s the chain’s second most crucial market, behind the United States.

As Starbucks ramped up in China, many investors fretted about competition there from the likes of Luckin Coffee Inc., a fast-growing Chinese rival that went public this year. Their concern grew when Starbucks said a year ago that same-store sales in China had slipped 1% in the latest quarter.

“That left a bad taste in a lot of investors’ mouths,” Hottovy said.

But same-store sales in China have since rebounded with the help of a sharp rise in Starbucks Rewards members there, who now total 9.1 million, and the expansion of the firm’s app usage and deliveries that are made via Starbucks’ partnership with China’s Alibaba Group.

In addition, Johnson asserted that Starbucks stands apart from Luckin and others because of the quality of its coffee, “the fact that we handcraft beverages personalized for each customer,” and that its stores provide “a warm, welcoming environment” where customers can make personal connections.

“The steps we’ve taken have further differentiated our position,” Johnson said, “and that’s exactly the direct contributor to China’s great performance. The strategy is working and we’re going to continue to stay focused on that model.”

Analyst Andy Barish of the investment firm Jefferies said “it doesn’t seem like there’s a lot of overlap” between Starbucks and Luckin, whose outlets skip the frills while offering cheaper coffee. As Time put it this spring, “90% of Luckin outlets are little more than an austere counter with coffee machines in the corner of an office building lobby.”

“I don’t think it’s a huge competitive threat at this point,” Barish said.

Last week brought more good news: Starbucks’ results for its fiscal third quarter, which ended June 30, far exceeded analysts’ expectations. Global same-store sales growth shot up 6%, which included a 7% surge in the U.S. market and a 6% jump in China.

Starbucks also raised its forecast for its full-year earnings and revenue after those items also topped estimates in the third quarter, with adjusted earnings hitting 78 cents a share and revenue climbing to $6.82 billion.

The company “has bounced back and kept going,” Barish said, and concerns about Johnson’s leadership have subsided.

But Johnson and his team know from recent history that they can’t take any rival, or customer, for granted in any market worldwide, no matter how big Starbucks becomes.

“We do not take victory laps after a great quarter,” Johnson told analysts. “We focus on staying true to our mission and values, taking care of our partners, serving our customers and delivering results.”