One of the simple investment tenets of legendary American
fund manager Peter Lynch is ‘only buy what you understand’; in other words, the greatest stock picking tools at your disposal are your eyes, ears, common sense, and, in some cases, even your taste buds.

If you find it tough to live without a company’s product or service, said company should probably be on your investment watch list, even if the shares look pricey.

Take coffeehouse colossus Starbucks, for example. Many customers are hooked on its Americanos and Cappuccinos and its stores have evolved into gathering places where shoppers and commuters go to collect their daily Flat White, Peppermint Mocha or Pumpkin Spice Latte, and become cafes they frequent in order to chat, meet up or
even work.

STARBUCKS CORP – KEY STATS

Listing: NASDAQ

Ticker: SBUX

Share price: $95.88

Market capitalisation: $112.5 billion

Forecast dividend yield: 1.9% (source: Sharecast)

President and chief executive: Kevin Johnson

The Covid-19 pandemic has dramatically reduced footfall to its sprawling global portfolio of stores and has cost the coffee company billions in lost sales due to temporary store closures, reduced opening hours and reduced customer traffic.

And yet Starbucks’ two biggest markets, the US and China, are rebounding more rapidly than anyone might have expected from the pandemic.

Traffic remains more muted than in more normal times, yet customers are also spending on bigger drinks in a bid to raise their spirits and Starbucks is also seeing greater sales of higher-priced cold drinks and plant-based options too.

ALL ABOUT THE BUCKS

The story dates back to 1971, when Starbucks emerged as a roaster and retailer of whole bean and ground coffee, tea and spices with a single store in Seattle’s Pike Place Market.

Named after the first mate in Herman Melville’s Moby Dick, the Starbucks moniker evokes the romance of the high seas and the seafaring tradition of the early coffee traders. Its ubiquitous logo is also inspired by the sea, featuring a twin-tailed siren from Greek mythology.

Starbucks went public in 1992 at a $17 per share issue price (that’s $0.53 per share when adjusted for subsequent stock splits), meaning investors who backed the float at the time have made serious money. So how does Starbucks bring in the bucks?

Seattle-headquartered to this day, present-day Starbucks is a coffee roaster and retailer of specialty coffee with operations spanning more than 80 global markets.

Guided by its president and CEO Kevin Johnson, Starbucks has north of 32,000 company-operated and licensed stores and counting. Besides being the world’s preeminent purveyor of coffee, Starbucks makes money by selling everything else that goes with a coffeehouse experience – premium teas and pastries, sandwiches, grain bowls and oatmeal as well as other delectable treats.

Pop into one of its outlets and you’ll also see an array of coffee and tea brewing equipment, mugs and accessories, packaged goods, books and gifts.

And the Nasdaq-listed giant also generates revenue by licensing its trademarks through channels such as licensed stores, grocery and foodservice. Besides the flagship ‘Starbucks Coffee’ brand, it sells goods and services under brands including Teavana, Seattle’s Best Coffee, Evolution Fresh, Ethos Water and Starbucks Reserve.

FULL OF BEANS

Admittedly, Starbucks is a premium-priced stock trading on 31.9 times 2021 forecast earnings, yet Covid-19’s economic shutdowns are likely to have weakened major rivals and delivered a crushing blow to small coffee shop independents around the world, many of which will never re-open.

That means there is a massive market share opportunity ahead for Starbucks when a vaccine arrives and the world opens up. And Starbucks appears to be a business full of beans with a compelling revenue recovery story already underway.

Results for its fourth quarter topped analysts’ estimates on both the revenue and profit lines with net sales dropping 8% to a better-than-feared $6.2 billion. In the US, Starbucks closed the fourth quarter with a comparable store sales decline of 4% for the month of September.

That marked a dramatic improvement from the 60% decline experienced at the height of the pandemic. For September in China, comparable store sales were up 1%, building on the positive momentum seen in the third quarter.

Johnson said he was ‘very pleased with our strong finish to fiscal 2020, underpinned by a faster-than-expected recovery in our two lead growth markets, the US and China.

‘These results demonstrate the continued strength and relevance of our brand, the effectiveness of the actions we’ve taken to adapt to meaningful changes in consumer behavior and the extraordinary efforts of our green apron partners to serve our customers and communities in challenging circumstances.’

At the end of Q4, roughly 98% of Starbucks’ global company-operated store portfolio was open, with 97% in the US and 99% in China, not to mention 99% in Japan and 97% in Canada. And approximately 93% of its global licensed store portfolio was up and running too.

The coffee roaster even issued an outlook for full year 2021 , predicting stronger growth than that forecast by Wall Street. Johnson and his team guided to global like-for-like store sales growth of 18%-to-23%, with 27%-to-32% like-for-like growth forecast in China, where the company expects to open a net 600 new stores as its global expansion continues.

DELIVERING ON DIGITAL AND DIVIDENDS

Starbucks’ unwavering investment in its industry-leading digital platform is keeping it two or three steps ahead of what’s left of the competition, allowing customers to have their favourite drinks delivered to them. Expanding initiatives such as the ability to order via an app and come to a store for collection are helping to drive its sales recovery.

For instance, in the fourth quarter, roughly 75% of its US sales volumes were generated via drive-thru and mobile orders and the company also saw a rebound in the number of active Starbucks Rewards members, which grew 10% year-on-year to 19.3 million members in America alone.

Anyone who thinks Starbucks has gone ex-growth is patently wrong. And the stock should interest income investors too. While many companies elected to suspend their dividends when the dreaded pandemic arrived, Starbucks decided to continue with a progressive shareholder reward, a testament to its financial strength.

It will shortly pay (27 Nov) a $0.45 quarterly dividend, an increase of 10%, to shareholders, marking the tenth consecutive annual dividend increase from the cash generative business. Buy the shares.

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