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How Strong was Starbucks’s Brew in 2019?

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Starbucks (SBUX) stock appreciated 36.5% in 2019. Plus, the stock beat the benchmark S&P 500 Index, which surged 28.9% last year. Starbucks delivered a strong performance in fiscal 2019, which ended on September 29, 2019.

However, this happened amid growing competition, mainly in international markets. The company continued to confront the increasing face-off with Luckin Coffee (LK) in China. Also, Coca-Cola buying Costa Coffee implies more competition for Starbucks. It seems Coca-Cola intends to expand Costa’s global presence.

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Starbucks’s strong fiscal 2019 earnings

The world’s largest coffee chain reported strong earnings for the fourth quarter as well for fiscal 2019. Its Q4 revenue grew by 7% YoY (year-over-year) to $6.75 billion. Also, it beat analysts’ estimates of $6.68 billion. Incremental revenue from new stores and strong comparable-store sales growth of 5% drove the company’s revenue.

Also, the company opened 630 net new stores during the fourth quarter. It ended the fourth quarter with 31,256 stores, reflecting a 7% YoY growth. Its Q4 adjusted EPS rose 12.9% YoY to $0.70 in line with analysts’ forecast.

Plus, the company’s fiscal 2019 looked strong, backed by revenue growth of 7.2% to $26.51 billion. It slightly beat analysts’ forecast of $26.44 billion. Global comparable-store sales grew 5% in fiscal 2019, supported by comparable-store sales growth of 5% in the US and a 4% growth in China. The growth in the company’s China business came despite the threat of an economic slowdown in the region and increasing rivalry from Luckin Coffee.

The coffee chain continued to maintain its aggressive stance over store expansion, with over 1,900 new stores opening up globally in fiscal 2019. Also, the fiscal 2019 adjusted EPS of $2.83 was 16.9% higher than the previous fiscal year.

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Initiatives amid global competition

Starbucks has launched various initiatives in line with its Growth at Scale agenda, with a focus on growth in the US and China. In 2018, Starbucks joined hands with Nestle to form a Global Coffee Alliance program. The company will extend its brand’s reach through this alliance in the consumer packaged goods and foodservice channels.

Under this program, the coffee chain introduced three new coffee platforms in more than 30 new marketplaces. The new platforms are Starbucks by Nespresso, Starbucks by Dolce Gusto, and Starbucks roast and ground coffee. The company will expand its presence to 50 global markets in the first half of this year.

Besides Nestle, Starbucks formed a digital partnership with the Chinese e-commerce giant Alibaba (BABA). This partnership allows Starbucks rewards members to earn points for online shopping. In turn, this increased Starbucks’ digital presence in China. Also, the company enhanced its digital presence in China through the launch of Starbucks Delivers and Starbucks Now, a mobile order and pick-up facility.

Starbucks reported a 15% YoY increase in its US Starbucks Rewards program members to 17.6 million at the end of the fourth quarter. The membership within the Starbucks rewards program in China grew 45% YoY to 10 million active members while the fourth quarter ended.

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Fiscal 2020 outlook

Starbucks projected a very hopeful outlook for fiscal 2020. It expects a fiscal 2020 net revenue growth between 6%—8%. Meanwhile, analysts estimate its revenue to grow by 7.1% to $28.39 billion. The company expects its global comparable-store sales growth between 3%—4%. Additionally, it projects an operating income growth of 8%—10%.

Analysts estimate Starbucks’ fiscal 2020 adjusted EPS to grow 7.4% to $3.04. This projection is in line with the company’s projection in the range of $3.00—$3.05. The company expects to open around 2,000 net new stores globally in the current fiscal year. About 600 of these net new stores will open in the Americas. The other 1,400 stores will open internationally. Notably, the company expects to expand its store network in China by 600. So, this reflects a mid-teens growth rate.

Shareholder’s returns

In October 2019, the company announced a 14% rise in the quarterly dividend per share to $0.41. It has been increasing its dividend for the last ten years consecutively. Thus, as of January 2, the company’s dividend yield was 1.84%.

Starbucks returned $12.0 billion to shareholders via share repurchases and dividends in fiscal 2019. Notably, it repurchased around $21 billion during the last two fiscals. So, it is on the right course to meet its three-year commitment to return $25 billion by fiscal 2020 to shareholders.

Analysts’ ratings for Starbucks stock

About 41% or 13 out of 32 analysts assigned a “buy” rating to Starbucks stock. Meanwhile, 56% of analysts rate the stock a “hold.” So, the rest, only 3%, have a “sell” rating.

Currently, analysts have maintained a target price of $94.81 with an upside potential of 6.1% over the next 12 months. We believe that the stock will continue its surge. This belief is backed by the company’s strategic alliances, innovation, and growing global presence supporting its sales.

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