Dividend Forecast - Week of 5/23
Below are my incoming dividends for the week, and how they will be utilized:
Taxable
$SBUX - $0.49 per share, $1.50 total, cash
Roth IRA
$SBUX - $0.49 per share, $4.44 total, reinvesting

Do you have any dividends coming in this week?
Market Down? No Hoots Given
Bought more: $AAPL $MSFT $SBUX
New position: $SCHD (dividends being reinvested)

"Be greedy when others are fearful" - W.B.
I've been disconnected from the market this week (taken a week off), and came back home about 8:30PM, bought some stocks, and now chilling for the rest of the evening. Nothing better.
View 14 more comments
Shared Research Screens:
Value Line Top 100 Highest Growth
I’ve always seen excerpts in books touting Value Line as a valuable source of research analysis, but had never looked at subscribing. They’d always mentioned it was available at local public libraries free of charge. I don’t pay for investment advice like I don’t pay for women, so off to the library I went. I was shocked when the librarian showed me the giant binders of already crunched numbers of everything I’d ever wanted and more!
I said I was going to start sharing research screens weekly, but due to the backlog, I need to spit a few out a little quicker while valuations are still accurate & relatively attractive.
This first list started with a list of Value Line growth companies, 100 of them. I had to narrow the list somewhat, without my bias, so I used their provided statistics to cull the best investable options from the original list of their Top 100 Highest Growth Stocks.
The reason this quality growth screen jumped out at me in the first place was the qualifying criteria, eliminating most of the risk of making a bad decision (based on emotion or hype).
Value Line quote: “To be included, a company’s annual growth of sales, cash flow, earnings, dividends, and book value must together have averaged 10% or more over the past 10 years and be expected to average at least 10% in the coming 3-5 years.”
That says a lot about the stability, strength, & trajectory of a company and that’s the type of near zero risk, sleep well at night (SWAN) stocks I like to own. Especially when they’re undervalued or out of favor, just reported a bad quarter, or trading at historically low valuation multiples for any other myriad reasons.
Statistical categories included in this Value Line table include 1) Timeliness Rank, 1 being best time to buy, 5 being the worst, 2) Safety Rank, 1 being safest, 5 being the riskiest, 3) current P/E ratio, 4) estimated 3-5 year price appreciation, and 5) the company’s industry rank. I’ve chosen to personally eliminate all fortune telling/future predictions/economic forecasts, etc. from my analysis, therefore will exclude forward looking estimates whenever possible. To narrow the list from the top 100 to a more manageable list of the cream of the crop, I chose to look for company’s with a Timeliness & Safety rank of 1-2 to ensure highest quality & fair value/positive outlook, a P/E ratio below 30 to ensure I’m not paying too high a price, and top 10 rank in their industry to hopefully provide additional quality/moat/competitive advantage strength to the final contestants on #INVESTWITHDEEBO. Ensuring quality first, and value second, hasn’t failed me yet.
Turns out, only 2 companies met such high standards, so I had to relax criteria just a tad. Those two companies were Google and Microsoft ($MSFT just barely, with a P/E of 30.xx) Google was the sole company with an absolutely perfect score; 1 on Timeliness & Safety, P/E ~20, ranked #3 in their industry. And had +100% 3-5 year estimated price appreciation to boot.
So, relaxing the standards, I was able to get almost 25 company’s I think provide higher probability of outperformance going forward, although I don’t believe there’s a bad company on the list.
Value Line Top 100 Highest Growth Stocks; additionally screened for my 4 additional quality & valuation hurdles (timeliness, safety, P/E, industry rank) produced the following:
Hitting a perfect 4/4 parameters:
An exceptional 3/4 Parameters:
Still great 2/4 Parameters:
Couple Honorable Mentions that narrowly missed the expanded standards:
The reason I love screens like this is because every one of these 100 companies is a strong company. Starting with a high quality list, then further screening for quality & valuation from there, has drastically reduced the probability of making a bad investment. Unless I get my emotions involved, then I take an L occasionally. So I try to keep it as near 100% mechanical as possible. I understand the voting machine vs the weighing machine; price will always follow performance, may just take a bit for the herd to catch up😉
Sorry again for the forward looking estimates, I’m keeping them at a minimum, promise.
After doing this for hours today, I wanted to score them to give more of an idea on which I thought might provide the most upside. So I spent hours today developing a point system based on the quality & valuation metrics already discussed, plus quality, profitability, valuation metrics & margin of safety estimates from 3 of my most trusted & accurate data sources. The primary reason I wanted to do this, was because to take advantage of the most irrationally priced stocks, doesn’t always require us buying the best companies. So this scoring system gives points ranging from 5-25 per category, for 6 additional categories of quality, value, & MoS. Higher quality rank= more points, larger margin of safety=more points. This scale (admittedly with 100% personal emotion and bias) was intended to reward the companies that 1) hit the most parameters, and 2) had the largest margin of safety, therefore minimizing downside risk to an absolute minimum, while simultaneously increasing the probability of outperformance. So here is the same list, in order of points scored, on my totally made up point scale, to hopefully provide some context as to the level of undervaluation.
The points for all criteria equaled a possible total of 165 points. This would be a dream stock at a dream price. Google is the ONLY company to pass every single criteria every single step of my analysis today. Taiwan Semiconductor only scored slightly higher because the estimates for MoS were much deeper for $TSM than $GOOG. So even though they got 0 points on one indicator, they made up for it with more points for MoS. Google scored points as a top ranked candidate (top 25% of companies at time of comparison) in every single category. I’d have to dig through an entire notebook to count the data points that went into this 10 hour waste of a day, but Google scored perfect at every step. But with MoS estimates of only 6%-16%, this is a classic Buffet, “wonderful company at a fair price”. So here is my totally biased list of quality companies trading at fair or below fair value.
$TSM 125
$GOOG 120
$LAD 120
$NFLX 110
$SWKS 110
$MSFT 100
$ON 95
$LOW 95
$TMO 95
$MA 75
Remember, this is not a quality ranking. This list weights margin of safety equally with other metrics. The companies at the bottom of this list are great, just not as much probability of upside compared to more undervalued/out of favor stocks at the top of the list.
Hope this provides some SWAN stocks for other value, or growth at value, investor’s out there🤙
PS: Craziest part of seeing the results of this list, since it was just made today, is that I have actually opened positions in $TSM, $GOOG, $NFLX, $MSFT, $AVGO, $NVDA, $KLAC, & $LRCX in the last 30 days, based on my own analysis of what’s important. I don’t feel 100% confident just because any specific source agrees; but I feel comfortable trusting my outside data sources as 2nd opinions based on the experience I’ve had using them over the last few years. Never hurts to find more reasons to want to buy, or maybe avoid, a specific company.
This is one impressive post! Really appreciate all the time and effort you put in. Nice to see $GOOG make it to the top list but also there any a few companies that I need to check out since I never seen this tickers and maybe there some hidden gems for myself to explore more on!

Appreciate all the work you put into this
View 6 more comments
Conor Mac's avatar
$319.5m follower assets
SBUX: "We're Playing the Long Game"
Starbucks $SBUX continues to demonstrate a robust recovery in its domestic territory, with International (Ex-China) playing catch up. The focal point of Q2 earnings, however, was the temporal deterioration of the China business. Plagued so badly by zero-covid policy closures, the contagion from the China arm of the business resulted in Starbucks withdrawing guidance for the remainder of the year. But fear not, the prodigal son has returned for a third stint as CEO. Schultz has long been a catalyst for the Starbucks China expansion, expressing his desire for 5,000 stores in the region by 2021 as far back as 2015, when there were fewer than 1,500 stores. Reaffirming that he believes China’s dismal performance is transitory he would go so far as to suggest he is "convinced Starbucks' business in China will be eventually larger than our business in the U.S."

If we imagine Starbucks is a pizza for a moment, with the thick doughy base being the core business. Sat atop of that base, are toppings like supply chain woes, inflationary cost environment, looming management transition, high employee attrition, and discombobulated global mobility. These are what the observer sees when staring at this pizza… I mean business. All very yummy, but it’s missing something. A sprinkle of je ne sais quoi (gestures pinched fingers). Oh yes, there is a raging union movement still percolating within Starbucks’ most important market. Thankfully, unlike his predecessor, Schultz mustered up the courage to say the word, “union”, in the earnings call. There is a lot going on at the world’s favourite java joint, so I want to stick to the crucial matters at hand today; recovery, china, and the union.

Key Takeaways

• North America is Strong: North America recovering well, with revenues +17%, bolstered by a 5% increase in transactions and a 7% increase in average ticket. Comparable sales were up 12%, and pricing increases were met with minimal attrition and sustained demand.
• China Hurting: Lampooned by China’s zero-covid policy, revenues fell 14%, with average ticket down 4%, transactions down 20%, and a 23% decline in comparable sales. 1/3 of stores remain closed heading into Q3, and company-wide guidance for 22’ has been withdrawn as a result of the uncertainty.

• NFT/Web3 Chatter: Schultz announces some hair-brained ideas to incorporate Web3 and NFTs into Starbucks’ digital and rewards businesses. It will be the “digital third place”, apparently.

• Union: Unionised store count has 10x’d since I last wrote about Starbucks in March, standing at 65 stores. Only 12% of votes resulted in rejection.

• Hefty Reinvestment Cycle Ahead: Starbucks are set to reinvest heavily into store optimisation, wages and benefits, and digital, in an effort to transform the business in the face of changing consumer behaviour. Share repurchases have been axed to free up capital to do so.

Domestic Strength

All things considered, North America is doing relatively well. Churning out $5.45B in revenues (+17%) during the quarter, the region was supported by a 12% growth in comparable sales, a 5% increase in transactions, and a 7% increase in average ticket. Starbucks has raised prices several times over the last year to offset inflationary pressure with “negligible customer attrition”. This is similarly exemplified through the fact that both average ticket and transaction volumes hold strong. Even so, price events were not enough to outpace inflationary expenditure, as demonstrated by the segment’s EBIT margins.

Sitting at 17.1%, down 220bps YoY, there was some lapping of government subsidies that should be taken into consideration, but supply chain costs, investment in labour, and enhanced store partner wages and training costs, are the primary culprits here. With the announcement of further wage increases (likely to combat the union), and the continuation of an inflationary environment, it might be some time before things crawl back to equilibrium.
I chose the title for this memo because Starbucks is seemingly at risk of an impasse after its 50-year history, which Schultz plans to navigate by transforming the business once again. Cold beverages, for instance, is a product category that equates to anywhere between 60% and 75% of total beverage sales in a given quarter. Yet, despite the insatiable demand, Starbucks stores are not optimised for cold beverage output. Naturally, Schultz plans to reinvest in this area, expanding cold beverage station capacity in stores. That’s just one example, but the reality is that Starbucks was once a “third place” for consumers to physically park their posterior and chill for an hour or two and it’s still built for that reality.

Today, increasingly complex cold beverage orders are a larger part of that equation. Mobile Order & Pay, a $4B business in its own right which has grown 4x over the last 5-years, drove over 70% of store volumes in the States alongside an increasing demand for drive-thru. Delivery, another $500M business, is one which has grown 30% YoY as consumers continue to favour Starbucks from their homes or office. Even the way customers engage with Starbucks has changed. With 26.7M active Rewards members in the United States (120M total members), an approximate $11B or so is spent at Starbucks stores each year, from pre-loaded cards.

It comes as no surprise that Starbucks needs to get with the times. Schultz appears to be ready to do just that:

“Given record demand and changes in customer behaviour we are accelerating our store growth plans, primarily adding high-returning drive-thrus, and accelerating renovation programs so we can better meet demand and serve our customers where they are.”

He later remarked that ~90% of all new store openings would be high-returning drive-throughs. So, a multi-year investment cycle which understandably has to take place, but one that is going to cost a pretty penny. This was no doubt on Schultz’s mind during his first action as CEO, to shut down the share repurchase program and preserve liquidity. I had imagined, at the time of the announcement, that this was mostly related to the balance sheet, as Starbucks’ leaves a lot to be desired. This was echoed in the call, but supplemented with a narrative that ROI is stronger when reinvested into new US stores, which are cited to exhibit a ~55% ROI compared to annualised buybacks that sit at a ~10% ROI each year.

Put simply, “investments in our stores - have an outsized return relative to what we could do with buybacks”. As a shareholder, with a time horizon of longer than 2 weeks, I don’t hate this. Sure, EPS will suffer from no share repurchases, but dividends and heavy buybacks are oft signs that the company feels it has no other attractive avenues for reinvestment. To bemoan the assertion that management now feels it has a better way to use that capital is nonsensical.

NFTs

Speaking of nonsensical, I sighed as I listened to Schultz, a 68-year old man, enthuse about NFTs and Web3. More specifically, talks of a “big breakthrough idea” related to the launch of a “unique platform for NFTs” from Adam Brotman, the architect of the Starbucks digital app. If his app design is anything to go by, I am not optimistic about what he does with NFTs. Having long expressed a desire for Starbucks to gamify its app and rewards program, this is not what I had intended. Talks of creating a “digital third place” with the ability to create incremental revenue unto itself as a separate business, feel very 2021 to me.

However, I must admit, that I am eager to see what they will do to rejuvenate the rewards program, whilst remaining sceptical about the means through which they plan to do so.

International Weighed Down by China

The international segment was notably weighed down by the China results. Excluding China, the segment grew comparable sales in double digits and management attests that the segment is recovering well, despite the larger supply chain disruption than the US has faced. In aggregate, the segment generated record revenue of $1.7B (+4% despite China), which would have been +23% excluding China. On a consolidated basis, transactions (-3%), comparable sales (-8%), and average ticket (-5%) all declined, alongside a lofty 520bps decline in international EBIT margins (10.6%), mostly attributable to the same variables that have plagued the domestic EBIT margin. Starbucks International generated just $181M in operating income this quarter for their 17,701 stores (+9%).

China is a Burst Couch

Shrowded by China’s zero-covid policy, 1/3 of stores were closed in Q2 and the rest remained partially open. Results are so poor and the near-term is so uncertain in this region, that company-wide guidance was suspended as the ambiguity looks set to continue. Reports suggest that China intend on continuing its zero-covid policy until October and possibly beyond.

“We expect an even greater impact on our Q3 results due to the timing of the Shanghai lockdown and a further resurgence of the virus in other cities”.

Since the beginning of 2019, Starbucks' Chinese footprint has grown from 3,685 to 5,654 stores (+35%). As ugly a picture the lockdowns paint on revenues and earnings, an optimist might argue that this has the appearance of a tightly wound spring, ready to unwind when things are "normal". In the second quarter of 2022, Chinese revenue fell 14% YoY to $734M, with average ticket down 4% and the volume of transactions down 20%, leading to a 23% decline in comparable-store sales.

As for the number of rewards members in China, cited to be ~18M in Q1’22, there was no update this quarter. These members drive ~75% of sales volume in China, compared to ~50% in North America. After an anaemic 100K net ads in Q1, my suspicion is that 90-day actives in China declined in Q2, understandably, and that management left out the number on purpose. Below is a visualization from 2018 (the furthest back China data goes). Here we can see the strong back-half resurgance that took place in 21’, only for revenues to be plagued by mobility once more in 2022.

*Q2’22 is TTM

The China business is set to look ugly for the remainder of the year, or at least until mobility resumes. For a business that should be generating more than $4B in annualised revenues at its current size, I stand by my assertion that China may one day be a $10B+ revenue business. That said, the fragility of Western brands’ relationship with the CCP is not lost on me. It only takes one policy alteration, one change of heart, or one tariff, for the China growth story to suffer the fate of a communist sledgehammer. As such, China represents one of the handful of facets that make up the Starbucks bull case but is a relatively larger component of the bear case.

The Union
When I first wrote about the union in February, 88 stores had filed to request a union vote. By March, 141 stores had filed and 6 stores had officially unionised. Today, the approximate number of unionised stores is 10x that, at 65 across the country with only ~12% of stores voting no.

Whilst still a fraction of the overall base, the momentum is continuing. In the earnings call, we finally had someone from Starbucks address the topic head-on. In his opening remarks, Schultz would remind listeners that “our values are not and never have been the result of demands or interference from any outside entity”.

He would continue to outline new benefits that would be rolling out to non-union partners this fall. Benefits include; wage hikes, a new partner app, improved tipping functionality, reinvestment in stores, extending training hours from 23 to 40, and the reintroduction of Starbucks’ Black Apron, Coffee Master and Origin Trip programs. Naturally, the SWBU had their own narrative, claiming that Starbucks would be refusing access to said benefits for unionised stores.

This, being contrary to what Schultz actually said, simply remarking that these benefits would not be unilaterally granted to unionised stores because of the mandatory bargaining process that has to take place. They will be offered, at which point the SBWU are obliged to accept or counter.

If the SBWU “demand these modest improvements be given immediately to all workers”, then is that not the ideal outcome for both parties? I foolishly said as much under that tweet and was called every name under the sun by a gang of unionists. Lesson learned. These benefits are no doubt to control the narrative and persuade partners to buck the union. The SBWU would call it “union-busting”, but at the end of the day, are unions not there to ensure benefits like these come to pass?

Equally intriguing, Starbucks has decided to move up their December investor day to September, to show off both their “pipeline of disruptive innovation” and their “coming transformation and reimagination of the Starbucks customer and partner experiences”. I suspect this was also done to get ahead of the curve on the union drive and show off their spangly new benefit plan. All in all, this union isn’t showing signs of retreating anytime soon, but Schultz and the gang are doing everything in their power to halt it. I have spoken before about the ramifications on margins and the fact that a union for Starbucks makes little sense. So, will leave you with the points that Autumn Capital outlined last quarter on the problems with unionising low-skilled service workers

Financials

For the quarter, Starbucks pulled in $7.6B in revenues (+15%), growth which was carried mainly by North America and International Ex-China. EBIT of $949M was down 4% on the year, with margins down 240bps on account of variables already discussed. China is expected to contribute “half of what we typically expect” in EBIT by year’s end, so some notable headwinds there. Earnings, $675M, were up 2.3%. Much of what I wanted to highlight regarding the income statement has already been discussed, but one last anecdote about margins before we move on.

Last year, investors were told that EBIT margins could expand to 18.5% by 2023. Then the macro-environment got choppy, and Starbucks decided to reinvest ~$1B into staff wages and training. We were told this goal would be pushed out to 2024 as a result. This quarter, that LT target was brought up, only to be sidestepped by Ruggeri (CFO). With all of these reinvestment outlays coming, albeit necessary ones, across digital, automation, equipment, remodelling, staff training and wages, I suspect the majority of these expenses are capitalised, but with wages and benefits being included in store operating expenses, it might take some time before sales leverage can erode their margin impact.

Schultz attests that demand is healthy enough to allow that to happen, telling investors to “just wait until we upgrade the system”, remarking that following this reinvestment period, investors are “going to see us recording the kind of store-level economics we have in the past”. I don’t doubt Schultz has the vision and character to pull this off, but he is not going to be here to see that through.

Balance Sheet
With ~$2B in term debt ($1B of which is due in the calendar year) maturing in the next 12 months, Starbucks issued $1.5B in senior notes in February to refinance a portion of their $16B debt balance. $500M of which is due in 2024, with the remainder set to mature in 2032.

Whilst the decision to pause share repurchases was garnished with an ROI narrative, I suspect it had as much to do with Starbucks’ balance sheet weakness. Excluding the value of stored card balances, Starbucks has a cash ratio ($3.9B cash) of just 0.54. Interest is well covered by the company’s EBIT (~7.6x) and the business is a notorious cash flow producer, but with maturities looming, a $1.1B dividend to pay out each quarter, undergoing a reinvestment cycle during an inflationary environment, and the certainty of those cash flows diminishing in regions like China, halting Starbucks’ repurchases feels like the prudent move.

Prior to the announcement, Starbucks had been expected to utilise ~$8B to repurchase more shares through 2023. The move to abandon repurchases was met with a positive response from credit rating agencies. Moody’s (below) would note that they believe Starbucks has the “necessary levers to pull to navigate these operating challenges and the pandemic-induced restrictions in key markets such as China which should subside over time”.

Source: Moody’s (H/T to @ayeshatariq for sharing)

Concluding Remarks

Drawing conclusions on the quarter, and quarters past, it’s evident Starbucks is in a state of transition. So much so, that Schultz attests to be “playing the long game”. As noted, he is not reported to be at Starbucks long enough to see that through. Originally here until the fall, he now commits to staying on to assist the new CEO until early 2023, whilst remaining on the board thereafter. In his closing remarks, he would remark; “I understand what's needed, and I'm back to lead this transformation and committed to seeing it through”. So, either he thinks this can be completed within the year, or he is signalling that he will stay until the job is finished. I don’t quite know, but walking into this role mid-transition is not an easy feat for any new CEO, so I remain cautious of the eventual managerial transition.

Moving on, when is the best time to acquire a business? When the business itself is going through a hard time? Rather, I believe it is when the market recognises that a business is going through a hard time. There are a number of negative sentiments hanging over Starbucks, many of which I have spoken about today. In my opinion, most of them are temporal. China’s situation is uncertain but unlikely indefinite. Starbucks has survived recessions in the past seeing revenue grow in 2008, and fall 6% in 2009, before recovering the following year. Inflation, and macro generally, is something I have no control over, nor do I have any predictive powers. The data that came out yesterday, on May 11th, shows that whilst inflation is still rampant, we might have seen the worst of it, with more than half of the components down MoM.

These things tend to be volatile but inflation could potentially be topping. Caveat: just because expectations are falling, I don’t assume humans are any greater at predicting disinflation than an aardvark is at playing Nocturne in E flat major.

Starbucks is not quite in capitulation mode, but it does trade a pretty discount to its pre-covid valuation in the low $70s. There are certainly cheaper names out there, but at 19x trailing earnings (24x forward earnings) I have been taking small bites of Starbucks once again after I sold the remainder of my stake from my taxable brokerage at $115 on September 21’ and at $93 on Feb 22’.

For context, the sale in September was unloading excess weight from a heavy March 20’ purchase after it had retraced. The remainder was sold on Feb 22’ so that I could place my Starbucks exposure into a second account, one with more of a focus on yield and coffee can style investing (no pun intended).

Thanks for reading.

Conor,
post mediapost media
Good insight on the union issue. I've owned SBUX in the past. The union issue is one thing I'm paying close attention to. Hoping to see an amicable relationship here.
View 9 more comments
Conor Mac's avatar
$319.5m follower assets
Starbucks Reaches 65 Unionised Stores
When I first wrote about the union in February, 88 stores had filed to request a union vote. By March, 141 stores had filed and 6 stores had officially unionised. Today, the approximate number of unionised stores is 10x that, at 65 across the country with only ~12% of stores voting no. $SBUX

Whilst still a fraction of the overall base, the momentum is continuing. In the earnings call, we finally had someone from Starbucks address the topic head-on. In his opening remarks, Schultz would remind listeners that “our values are not and never have been the result of demands or interference from any outside entity”. He would continue to outline new benefits that would be rolling out to non-union parts this fall. Benefits include; wage hikes, a new partner app, improved tipping functionality, reinvestment in stores, extending training hours from 23 to 40, and the reintroduction of Starbucks’ Black Apron, Coffee Master and Origin Trip programs.

Naturally, nobody at the SWBU had their own narrative, claiming that Starbucks would be refusing access to said benefits for unionised stores.

This, being contrary to what Schultz actually said, simply remarking that these benefits would not be unilaterally granted to unionised stores because of the mandatory bargaining process that has to take place. They will be offered, at which point the SBWU are obliged to accept or counter.

If the SBWU “demand these modest improvements be given immediately to all workers”, then that is the ideal outcome for Starbucks too? I foolishly said as much under that tweet and was called every name under the sun by a gang of unionists. Lesson learned. These benefits are no doubt to control the narrative and persuade partners to buck the union. The SBWU would call it “union-busting”, but at the end of the day, are unions not there to ensure benefits like these come to pass?

Equally intriguing, Starbucks has decided to move up their December investor day to September, to show off both their “pipeline of disruptive innovation” and their “coming transformation and reimagination of the Starbucks customer and partner experiences”. I suspect this was also done to get ahead of the curve on the union drive and show off their spangly new benefit plan. All in all, this union isn’t showing signs of retreating anytime soon, but Schultz and the gang are doing everything in their power to halt it. I have spoken before about the ramifications on margins and the fact that a union for Starbucks makes little sense. So, will leave you with the points that Autumn Capital outlined last quarter on the problems with unionising low-skilled service workers
post mediapost media
I know $SBUX looks great from a performance perspective. I haven’t heard rumblings from their employees sounding as unhappy as Amazon’s, but I also don’t consume media outside ESPN and CommonStock anymore. I agree that it would probably be a temporary headwind as plenty of companies cooperate with unions. It may stop me from buying right now, but if I was holding, I would continue to do so.
View 7 more comments
Conor Mac's avatar
$319.5m follower assets
Starbucks Domestic and the Search for Greater ROI
All things considered, Starbucks' North American segment is doing relatively well. Churning out $5.45B in revenues (+17%) during the quarter, the region was supported by a 12% growth in comparable sales, a 5% increase in transactions, and a 7% increase in average ticket. Starbucks has enacted several price events over the last year to offset inflationary pressure with “negligible customer attrition”. This fact is similarly exemplified through the fact that both average ticket and transaction volumes hold strong. Even so, price events were not enough to outpace inflation, as demonstrated by the segment’s struggling EBIT margins. $SBUX

Sitting at 17.1%, down 220bps YoY, there was some lapping of government subsidies that should be taken into consideration, but supply chain costs, investment in labour, and enhanced store partner wages and training costs, are the primary culprits here. With the announcement of further wage increases (likely to combat the union propaganda), and the continuation of an inflationary environment, it might be some time before things crawl back to equilibrium.

I chose the title for this memo because Starbucks is seemingly at risk of an impasse after its 50-year history, which Schultz plans to navigate by transforming the business once again. Cold beverages, for instance, is a product category that equates to anywhere between 70% and 80% of total beverage sales in a given quarter. Yet, despite the insatiable demand, Starbucks stores are not optimised for cold beverage output. Naturally, Schultz plans to reinvest in this area, expanding cold beverage station capacity in stores. That’s just one example, but the reality is that Starbucks was once a “third place” for consumers to physically park their posterior and chill for an hour or two and it’s still built for that reality.

Today, increasingly complex cold beverage orders are a larger part of that equation. Mobile Order & Pay, a $4B business in its own right which has grown 4x over the last 5-years, drove over 70% of store volumes in the States alongside an increasing demand for drive-thru. Delivery, another $500M business, is one which has grown 30% YoY as consumers continue to favour Starbucks from their homes or office. Even the way customers engage with Starbucks has changed. With 26.7M active Rewards members in the United States (120M total members), an approximate $11B or so is spent at Starbucks stores each year, from pre-loaded cards.

It comes as no surprise that Starbucks needs to get with the times. Schultz appears to be ready to do just that:

“Given record demand and changes in customer behaviour we are accelerating our store growth plans, primarily adding high-returning drive-thrus, and accelerating renovation programs so we can better meet demand and serve our customers where they are.”

He later remarked that ~90% of all new store openings would be high-returning drive-throughs. So, a multi-year investment cycle which understandably has to take place, but one that is going to cost a pretty penny. This was no doubt on Schultz’s mind during his first action as CEO, to shut down the share repurchase program and preserve liquidity. I had imagined, at the time of the announcement, that this was mostly related to the balance sheet, as Starbucks’ leaves a lot to be desired.

This was echoed in the call, but supplemented with a narrative that ROI is stronger when reinvested into US stores, which are cited to exhibit a ~55% ROI compared to annualised buybacks that sit at a ~10% ROI each year. Put simply, “investments in our stores - have an outsized return relative to what we could do with buybacks”. As a shareholder, with a time horizon of longer than 2 weeks, I don’t hate this. Sure, EPS will suffer from no share repurchases, but dividends and heavy buybacks are oft signs that the company feels it has no other attractive avenues for reinvestment. To bemoan the assertion that management now feels it has a better way to use that capital is nonsensical.

NFTs

Speaking of nonsensical, I sighed as I listened to Schultz, a 68-year old man, enthuse about NFTs and Web3. More specifically, talks of a “big breakthrough idea” related to the launch of a “unique platform for NFTs” from Adam Brotman, the architect of the Starbucks digital app. If his app design is anything to go by, I am not optimistic about what he does with NFTs. Having long expressed a desire for Starbucks to gamify its app and rewards program, this is not what I had intended. Talks of creating a “digital third place” with the ability to create incremental revenue unto itself as a separate business, feel very 2021 to me.

However, I must admit, that I am eager to see what they will do to rejuvenate the rewards program, whilst remaining sceptical about the means through which they plan to do so.
post mediapost media
What a write-up. I just started building my $SBUX position in the last week after having it high on my watchlist the last two years. Will take a while to scale in as I just recently started slowly deploying during these conditions.

Have you ever been to a Starbucks Reserve storefront? I’ve been to the one on Michigan Ave in Chicago. Would be interested in seeing those financials in particular, and as a part of their overall bottom line (however marginal).
View 3 more comments
Luka 🦉's avatar
$88.5m follower assets
Portfolio Update 📊 06.05.2022
Hello fellow investors 👋
here is the link to the details of my portfolio (dividend stocks + ETFs)


Performance in April was bad as expected, especially since the ETF portfolio lost quite a while cause it is heavily exposed to indexes like Nasdaq100 and S&P500. On the other hand, the dividend portfolio has a low beta and performs better than the market, but still negative.

New Stocks:

$SBUX is a new holding. I started a wheel strategy on Starbucks, and I immediately got assigned, so I am now selling covered calls. But meanwhile, the stock is there in my portfolio, collecting dividends.

$GOOG also is a new holding. I understand it is not correct to consider this stock in the dividend portfolio cause it is not paying any dividends. Still, I don't want to create a different portfolio only for that.

As you can see, the ETF portfolio shows data in $ amount while the dividend portfolio only in %. It is something I will fix in the future, being 100% transparent.

If you have any questions, let me know in the comments below. 👇
post media
Conor Mac's avatar
$319.5m follower assets
Starbucks' Chinese Footprint Resembles a Coiled Spring
Since the beginning of 2019, Starbucks' Chinese footprint has grown from 3,685 to 5,654 stores (+35%) $SBUX. As ugly a picture the lockdowns paint on revenues, the bull case would imply this is a tightly wound spring, ready to pop when things are "normal".

In the second quarter of 2022, Chinese revenue fell 14% YoY, with average ticket down 4% and the volume of transactions down 20%, leading to a 23% decline in comparable-store sales. The recent zero-covid policy of China, and nationwide lockdowns, is clearly hurting Starbucks.

Below is a visualization from 2018 (the furthest back China data goes). The China business is likely to look ugly for a little while with 1/3 of stores closed in Q2. After resurgance in 2021, the segment is now plagued by mobility once more in 2022

*Q2'22 revenue is TTM

But Howard Schultz states that he remains "convinced Starbucks' business in China will be eventually larger than our business in the U.S."
post mediapost media
Commonstock is a social network that amplifies the knowledge of the best investors, verified by actual track records for signal over noise. Community members can link their existing brokerage accounts and share their real time portfolio, performance and trades (by percent only, dollar amounts never shared). Commonstock is not a brokerage, but a social layer on top of existing brokerages helping to create more engaged and informed investors.