Starbucks (NASDAQ:SBUX) stock fell more than 6% on Friday as Wall Street soured on the company’s fiscal year 2021 (FY 2021) fourth-quarter results. Starbucks stock is now down 1% year to date, compared to the S&P 500’s 22% gain.
Despite short-term difficulties, Starbucks’ ability to grow revenue from existing locations while also opening an average of six nett new locations per day indicates that its core business is doing well. Here are five compelling reasons why investors should take a closer look at Starbucks stock right now.
1. Business in North America is booming
Starbucks reported record quarterly revenue of $8.1 billion, fueled by a 22% increase in US store sales year over year. The bad news is that comps in China stores decreased by 7%, owing in part to COVID-19-related issues. However, the company increased global store sales by 17% year over year in the third quarter.
Starbucks’ impressive North American performance demonstrates the company’s resilience once pandemic-related headwinds subside. Starbucks COO John Culver stated: “What we’re seeing in terms of customer behaviour is very similar to what we saw in prior quarters and prior to COVID. Thus, routines begin to normalise.”
2. Ordering via drive-thru and mobile device
Starbucks was under pressure to close in-person locations and focus on drive-thru and contactless transactions during the pandemic’s peak. On the plus side, the company has retained a significant portion of that drive-thru volume thus far in 2021, which bodes well for the launch of smaller stores focused entirely on grab-and-go ordering. “Today, drive-thru and MOP [mobile order and pay] transactions accounted for 70% of transactions, up 15% from pre-pandemic levels,” Culver said.
There’s a reason Starbucks is the Apple Store’s and Google Play Store’s No. 4 food and beverage app. Since its launch in 2015, Mobile Order and Pay (MOP) has grown to become a critical driver of same-store sales growth for the company. MOP expedites transactions; increases customer convenience in-store, kerbside, and drive-thru; and simplifies ordering specific drinks. Eliminating the inconvenience of standing in line to order, as well as the wait time for drinks and food to be prepared, makes visiting Starbucks more pleasurable, encouraging more frequent orders. MOP effectively enables the coffee giant to go insane with customised concoctions.
3. A devoted and expanding loyalty programme
The Starbucks Rewards programme is inextricably linked to MOP. The incredible growth in Starbucks Rewards membership was arguably the most significant takeaway from the company’s Q4 FY 2021 earnings report. “We will continue to invest in and leverage our technology-first mobile and digital capabilities, as well as accelerate the growth of active Starbucks Rewards members,” CEO Kevin Johnson stated. “In fiscal year ’21, we increased our 90-day active Starbucks Rewards members, who represent our most loyal and engaged customers, by approximately 30% to 24.8 million members. Notable is the fact that 51% of tender for company-operated stores in the United States was generated by this loyal customer base in Q4 “r foundation.” Consider that Starbuck’s 90-day active Rewards members ended fiscal year 2020 up only 10% from fiscal year 2019.
Starbucks, like any other store, restaurant, or retail outlet, receives occasional one-time customers who are simply passing through. However, the majority of its business comes from repeat customers. Starbucks is increasing its customer base through MOP, a stronger emphasis on drive-thru, and the strength of its rewards programme. By encouraging customers to spend more per transaction and visit more frequently, it paves the way for increased profitability, independent of store count growth.
4. Increased compensation for employees
Starbucks is increasing wages as part of its investment in its employees. “By next summer, hourly partners in the United States will earn an average of nearly $17 per hour, with barista wages ranging from $15 to $23 per hour,” Johnson explained. While increased costs will undoubtedly impact Starbucks’ margins, the company expects to grow revenue by 11.8 to 13.6 percent in fiscal year 2022, while maintaining a 17 percent operating margin. However, Starbucks anticipates increasing its operating margin to between 18% and 19% by fiscal year 2023. In other words, Starbucks can absorb higher wages in the medium to long term without jeopardising profitability.