Pricing Adjustments And Store Redesigns Will Drive Future Customer Visits

Key Takeaways

• Starbucks focuses on enhancing customer experience and operational efficiency to boost revenue and improve net margins.
  
• Pricing adjustments and strategic store redesigns aim to drive customer visits and support long-term growth and loyalty.
  
• Persistent traffic issues, competition, and macroeconomic challenges in key markets like China signal potential revenue and profitability pressures amidst operational disruptions and corporate uncertainty.

Catalysts

Operates as a roaster, marketer, and retailer of coffee worldwide.

• Starbucks is refocusing on a Back to Starbucks strategy, aiming to improve the customer experience by enhancing in-store service efficiency and reducing wait times, which is expected to drive higher customer traffic and thereby increase future revenue.
  
• The company plans to streamline its menu by reducing complexity and aligning with its core identity as a coffee company, which is projected to improve operational efficiency and potentially enhance net margins.
  
• Starbucks is revisiting its pricing strategies by eliminating upcharges for nondairy milk and limiting future price increases, which could improve customer perceptions of value and drive revenue growth through increased customer visits.
  
• The company is committed to optimizing in-store and out-of-store efficiencies, including workforce management and supply chain operations, to achieve cost savings and enhance net margins over time.
  
• A planned reduction in new store openings and renovations in favor of high-impact redesigns aims to create a welcoming coffee house environment, enhancing customer experience and supporting long-term earnings growth as foot traffic and customer loyalty potentially increase.

Starbucks Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Starbucks's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 11.5% in 3 years time.
• Analysts expect earnings to reach $5.0 billion (and earnings per share of $4.53) by about December 2027, up from $3.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $5.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.7x on those 2027 earnings, up from 27.8x today. This future PE is greater than the current PE for the US Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 1.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.91%, as per the Simply Wall St company report.

Starbucks Future Earnings Per Share Growth

Risks

• Persistent traffic challenges have resulted in declines in both U.S. and China comparable store sales, which could negatively impact future revenue if not addressed effectively.
  
• The company is facing increased competition and a challenging macroeconomic environment in China, leading to a decline in consumer spending and impacting earnings.
  
• The contraction of operating margins, driven by wage and benefit investments and increased promotional activities, suggests that profitability could remain under pressure if such issues persist.
  
• Disruption in store operations during redesigns and renovations might temporarily affect revenues and profit margins if closures or operational inefficiencies arise.
  
• The decision to suspend guidance due to CEO transition and the current state of the business highlights uncertainty around future performance and could pose risks to earnings projections.

Valuation

• The analysts have a consensus price target of $103.3 for Starbucks based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $76.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $43.3 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 28.7x, assuming you use a discount rate of 7.9%.
• Given the current share price of $92.09, the analyst's price target of $103.3 is 10.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.