Starbucks is the world's largest coffeehouse chain and the preferred choice for many customers seeking to enjoy coffee away from home. It leads in brand loyalty, customer visits, and visit frequency across various markets. Additionally, Starbucks ranks among the top 30 most valuable brands globally. While I tend to favor companies with a strong brand presence, it's essential to determine whether now is the right time to invest in Starbucks. This analysis aims to explore that question.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Starbucks. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Starbucks either. Thus, I have no personal stake in Starbucks. If you want to purchase shares (or fractional shares) of Starbucks, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
The Business
Starbucks was founded in Seattle, USA, in 1971 with a single shop. It has since grown to become the largest coffee chain in the world, operating 40.000 stores across more than 80 countries and serving over 100 million customers daily. Starbucks operates two types of stores: company-operated stores, which comprise 52% of its total stores, and licensed stores, accounting for the remaining 48%. Company-operated stores generate 82% of total revenue, while licensed stores contribute 12%. Licensed stores offer higher operating margins since licensees cover operating costs and capital investments, enabling Starbucks to focus on scaling its brand with reduced risk. The company has also diversified its business through strategic partnerships. Its agreement with Nestlé allows Nestlé to market Starbucks coffee and foodservice products globally, making these products widely available in supermarkets. Additionally, Starbucks collaborates with PepsiCo to distribute its ready-to-drink beverages. Starbucks' moat lies in its strong brand recognition and customer loyalty. As the leading roaster, marketer, and retailer of specialty coffee, Starbucks has established a trusted name in the industry. Its Starbucks Rewards loyalty program and mobile app drive customer engagement and repeat visits, strengthening its connection with consumers. The company operates through three segments: North America, which accounts for 75% of revenue; International, contributing 20%; and Channel Development, which makes up 5%. The Channel Development segment focuses on packaged coffee, tea, and ready-to-drink products distributed through partnerships and other channels.
Management
The CEO of Starbucks is Brian Niccol. He joined the company as Chief Executive Officer in September 2024, bringing over 25 years of leadership experience across globally recognized brands. Prior to Starbucks, Brian Niccol served as the CEO of Chipotle Mexican Grill, where he led a remarkable transformation, more than doubling the business during his tenure. Under his leadership, Chipotle became a culinary leader, embraced digital innovation, introduced new menu offerings, and expanded internationally. Before Chipotle, Brian Niccol held leadership roles at Taco Bell and Pizza Hut, divisions of Yum! Brands, where he contributed significantly to marketing, innovation, and operations. He began his career in brand management at Procter & Gamble and currently serves on Walmart's board of directors. Niccol holds a bachelor’s degree from Miami University in Ohio and an MBA from the University of Chicago’s Booth School of Business. In his first earnings call as Starbucks CEO, Brian Niccol shared his vision for the company. “Everything I have seen and heard tells me we have significant strengths to build on,” he stated, emphasizing the enduring power of the Starbucks brand and its deep coffee expertise. Acknowledging current challenges, he added, “Our financial results were very disappointing, and it is clear we need to fundamentally change our strategy to win back customers and return to growth. Back to Starbucks is that fundamental change. We have to get back to what has always set Starbucks apart.” Drawing on his success at Chipotle, Brian Niccol underscored the importance of leveraging the dedication of Starbucks employees and partners to drive meaningful improvements. “When we get back to our core identity and consistently deliver a great experience, our customers will come back. Our problems are fixable. Most of what we need to do is in our control,” he said. While Brian Niccol is still new to Starbucks, his impressive track record at Chipotle makes him a strong choice for the role. His appointment has been well-received by the market, with Starbucks shares jumping 23% following the announcement, reflecting high investor confidence in his leadership.
The Numbers
The first metric we will examine is the return on invested capital (ROIC). We aim to review a 10-year history, ideally with all figures exceeding 10% annually and showing an upward trend. Starbucks has consistently delivered impressive financial results over the past decade. Remarkably, it was only during the pandemic that Starbucks recorded a ROIC below 30%. Even more notable is that Starbucks achieved a ROIC above 70% in three of the past six years, despite the challenges posed by the pandemic in fiscal 2020 and fiscal 2021. In fiscal year 2024, ROIC decreased due to a combination of declining sales, rising operational costs, and broader economic challenges. However, Starbucks remains committed to enhancing operational efficiencies and improving customer experiences, which should support an increasing ROIC moving forward. Delivering a ROIC above 50% in a challenging year is a testament to Starbucks' resilience and underscores its status as a high-quality company.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Starbucks has reported negative equity since 2019, primarily due to substantial share repurchases financed through increased debt. This strategy can be advantageous when the stock is undervalued and interest rates are low, as it enhances shareholder value. However, with the current environment of rising interest rates, it would be prudent for Starbucks to prioritize debt reduction to mitigate financial risk. Notably, the company's equity position has shown improvement over the past two years, although it remains negative.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Starbucks has consistently delivered positive free cash flow over the years, even during challenging periods like the pandemic, which significantly impacted the company, as evidenced by the lower free cash flow in fiscal year 2020. In fiscal year 2024, free cash flow declined due to record-high capital expenditures, driven by substantial investments in both new and existing stores. Management has indicated that capital expenditures will remain elevated in fiscal year 2025, with the expectation that these investments will yield long-term benefits for shareholders. The levered free cash flow margin has fluctuated over the years and reached its third-lowest level in fiscal year 2024, primarily due to the high capital expenditures. However, management anticipates that the levered free cash flow margin will improve in the future as the benefits of these investments materialize. The free cash flow yield is currently below its ten-year average, suggesting that the shares may be trading at a premium valuation. This aspect will be examined more closely in the valuation section of the analysis.
Debt
Another important aspect to examine is the level of debt, specifically whether a business has a manageable amount that can be paid off within a period of three years. This is calculated by dividing the total long-term debt by earnings. Upon reviewing Starbucks' financials, the company currently has 3,81 years' worth of earnings in debt. While this is slightly higher than the preferred threshold, it is not overly concerning. However, I would like to see Starbucks shift its focus from acquiring additional debt for share repurchases, a practice it has engaged in since 2019, to prioritizing debt reduction instead. Despite the debt-to-earnings ratio being marginally above three years, this does not deter me from considering an investment in Starbucks.
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Risks
Macroeconomic factors pose a significant risk to Starbucks because its financial performance heavily relies on consumer discretionary spending, which is highly sensitive to economic conditions. Economic slowdowns or recessions in key markets, such as the United States and China, can lead to reduced consumer spending on premium products like Starbucks coffee. Customers may cut back on discretionary purchases, opt for lower-priced alternatives, or shift to competitors offering more affordable options. Starbucks' vulnerability to economic downturns has been demonstrated in the past. For instance, during the 2008 global financial crisis, Starbucks experienced a 28% decrease in profits, which led to the closure of 900 stores. This highlights the exposure of its business model to prolonged economic pressures. A similar scenario today could result in reduced store traffic, lower average transaction values, and declining profitability. Inflationary pressures and rising interest rates further increase these risks. As living and borrowing costs rise, consumers may have less disposable income to spend on premium coffee and food products, further straining Starbucks' revenue. Additionally, prolonged negative economic conditions could lead to lasting changes in consumer behavior. Customers might develop habits of reduced discretionary spending or shift permanently to value-oriented alternatives, which would have long-term implications for Starbucks and the specialty coffee industry as a whole.
Preserving brand value is a critical challenge for Starbucks because its global success is deeply intertwined with its reputation. The Starbucks brand is celebrated for its high-quality products, consistent customer experience, and commitment to environmental and social responsibility. However, this reputation is susceptible to various risks that could diminish consumer trust and adversely affect financial performance. Starbucks’ reliance on subjective consumer perceptions presents a significant vulnerability, particularly in regions where the brand is still growing. Inconsistent customer experiences or unmet expectations in these markets could slow expansion and weaken brand equity. Operational challenges such as food contamination, product recalls, employee misconduct, or safety violations are another potential threat. These incidents, especially when amplified by social or digital media, can rapidly damage trust and public perception, even when claims are unfounded or exaggerated. The company's environmental and social commitments, which are integral to its identity, also carry risks. Falling short of sustainability targets or facing criticism for the pace or scope of its initiatives could undermine its credibility. With increasing consumer awareness and concern about issues like climate change and waste management, Starbucks faces growing pressure to deliver on its promises. Ultimately, the preservation of Starbucks’ brand value hinges on its ability to consistently provide quality products, uphold ethical practices, and achieve its environmental and social goals. Any failure in these areas could lead to boycotts, legal challenges, or damaging publicity, with potential long-term impacts on consumer trust and financial performance.
Competition poses a significant challenge for Starbucks due to the highly competitive nature of the specialty coffee market, where numerous players compete on factors such as product quality, brand reputation, customer service, convenience, and price. Starbucks faces pressures from specialty coffee retailers, quick-service restaurants, and the ready-to-drink coffee segment, as well as established and emerging competitors in international markets. In China, Starbucks’ second-largest market after the United States, local competitor Luckin Coffee has rapidly expanded using a lower-cost, mobile-focused business model. Luckin Coffee’s approach, characterized by mobile-only ordering, affordable pricing, and dense store networks, contrasts with Starbucks’ emphasis on creating inviting spaces for social interaction. This localized strategy has enabled Luckin to attract a broad customer base, leveraging aggressive pricing and tailored offerings. Starbucks has faced challenges in this market, including a significant decline in same-store sales, underscoring the risks posed by competitors that are more agile in adapting to local consumer preferences and economic conditions. In the United States, Starbucks contends with quick-service restaurants that have upgraded their specialty coffee offerings, providing comparable quality at lower prices. This competition can draw customers away, reducing foot traffic and average transaction values at Starbucks stores. Meanwhile, small specialty coffee retailers continue to expand in markets around the world, which could lead to further erosion of Starbucks’ market share. Beyond product and service competition, Starbucks also faces challenges in securing prime retail locations and recruiting qualified personnel. Competition for desirable store locations and talent can drive up operational costs, placing additional pressure on profitability.
Reasons to invest
Starbucks’ renewed focus on its core identity as a welcoming coffeehouse presents a compelling reason to consider investing in the company. This back-to-basics approach not only addresses current challenges but also establishes a solid foundation for sustainable growth. By emphasizing customer experience, operational efficiency, and brand integrity, Starbucks aims to deepen its connection with loyal customers while attracting new ones. The company’s decision to redesign existing locations underscores its commitment to quality over quantity. This strategic initiative focuses on enhancing the in-store experience, a defining feature of the Starbucks brand. By reintroducing personal touches - such as serving coffee in ceramic mugs, improving store layouts, and creating inviting spaces for customers to work, relax, or meet - Starbucks is reclaiming its role as the "third place" in people’s lives. Operational improvements form another cornerstone of Starbucks’ strategy. The company’s goal to serve handcrafted beverages within four minutes while managing mobile order volumes demonstrates a focus on efficiency without sacrificing quality. These initiatives are expected to boost customer satisfaction, encourage repeat visits, and reinforce Starbucks’ reputation for consistent, high-quality service. Starbucks’ pricing strategy also supports its vision of accessibility and inclusivity. Removing the upcharge for non-dairy milk and reducing reliance on discount-driven promotions highlight efforts to provide value while maintaining a premium positioning. By committing to no menu price increases through fiscal 2025, Starbucks is showing sensitivity to economic conditions, which helps foster customer loyalty in an increasingly competitive market.
Expanding internationally presents a compelling reason to invest in Starbucks, given the significant growth opportunities it offers beyond the U.S. market. Currently, only 20% of Starbucks' revenue comes from international operations, underscoring the considerable potential for global expansion. Starbucks has identified promising opportunities in regions with emerging economies and a growing middle class. As disposable incomes rise, particularly in developing countries, consumers increasingly seek premium experiences and high-quality products - areas where Starbucks excels. The company’s ability to introduce its iconic brand and signature coffeehouse experience to these markets positions it well to capture this growing demand. In regions like Southeast Asia, India, the Middle East, and parts of Europe, urbanization and evolving lifestyles are driving demand for premium coffee experiences. Starbucks, with its global brand recognition and operational expertise, is well-positioned to cater to these changing consumer preferences. The growing middle class in these regions is a key demographic in Starbucks’ international growth strategy. This group is drawn to aspirational brands that offer a combination of quality, convenience, and an enhanced customer experience, all of which align with Starbucks' offerings. Moreover, as the middle class expands, discretionary spending on experiences like coffee outings is expected to increase, creating further opportunities for Starbucks. With its premium products and welcoming store environments, Starbucks is poised to capture a significant share of this rising demand, fueling its long-term international growth.
Opening new stores is a compelling reason to invest in Starbucks, as it significantly contributes to the company’s growth and financial performance. In fiscal year 2024, Starbucks opened 735 new stores, resulting in a 7% increase in company-operated locations. This expansion played a critical role in offsetting challenges such as a 2% decline in same-store sales, demonstrating the importance of new store performance to overall revenue growth. The latest cohort of newly opened U.S. stores has delivered outstanding results, with each location generating an average of $2 million in annual sales and achieving an impressive return on investment (ROI) of approximately 50%. These figures highlight the profitability and strong financial impact of Starbucks' expansion strategy. Starbucks has been particularly successful in regions with fewer stores, where unmet demand creates significant opportunities to attract new customers. By strategically opening new locations, Starbucks aims to increase its market share and strengthen its position as a leading global brand. The company’s approach ensures that new stores are carefully placed to maximize potential, whether in established markets or emerging areas with growth potential. This combination of high returns from new store openings and opportunities in underserved regions provides Starbucks with a robust pathway for sustained growth and long-term profitability.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,31, which is from the fiscal year 2024. I have selected a projected future EPS growth rate of 12%. Finbox expects EPS to grow by 11,7% in the next five years. Additionally, I have selected a projected future P/E ratio of 24, which is double the growth rate. This decision is based on Starbucks' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $60,99. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Starbucks at a price of $30,49 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 6.096, and capital expenditures were 2.777. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 1.944 in our calculations. The tax provision was 1.207. We have 1.133 outstanding shares. Hence, the calculation will be as follows: (6.096 – 1.944 + 1.207) / 1.133 x 10 = $47,30 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Starbucks' free cash flow per share at $2,93 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is $40,36.
Conclusion
I believe Starbucks is an intriguing company, and I like the new management. Starbucks has delivered a high ROIC, which shows the quality of the company. Free cash flow and levered free cash flow have declined in the last year, but this is due to increased capital expenditures. Macroeconomic factors are a risk for Starbucks because its financial performance heavily relies on consumer discretionary spending, which can decline during economic slowdowns or recessions. Reduced disposable income, inflationary pressures, and rising interest rates can lead customers to cut back on premium purchases like Starbucks coffee. Preserving brand value is a risk for Starbucks because its global success depends on maintaining consumer trust, which is vulnerable to factors such as operational incidents, unmet customer expectations, and criticism over environmental or social commitments. Competition is a risk for Starbucks because the specialty coffee market is highly competitive, with rivals ranging from quick-service restaurants to emerging local brands like Luckin Coffee in China, which leverage aggressive pricing and innovative models. This intense competition can reduce customer traffic, pressure margins, and challenge Starbucks’ market share. Starbucks’ renewed focus on its core identity as a welcoming coffee house strengthens its customer connection and positions the company for sustainable growth by enhancing in-store experiences, improving efficiency, and adopting customer-friendly pricing. Expanding internationally is a reason to invest in Starbucks because only 21% of its revenue currently comes from global markets, leaving significant growth potential in regions with rising urbanization and a growing middle class. Opening more stores is a reason to invest in Starbucks because new locations drive growth and profitability, with recent U.S. stores generating $2 million in annual sales and achieving a high ROI. This strategic expansion allows Starbucks to tap into unmet demand, increase market share, and position itself for sustained long-term growth. I believe there are many things to like about Starbucks but also some uncertainties. Hence, I will only buy shares at the Ten Cap price of $47.
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