Starbucks: Food, Expansion, and Mobile Pay

07/20/2015 7:00 am EST


Our latest featured recommendation is a leading retailer of fresh-brewed coffee; we believe the company can continue to accelerate store openings, remodel stores, navigate difficulties in Europe, and integrate acquisitions, explains John Staszak of Argus Research.
We are maintaining our buy rating on Starbucks Corp. (SBUX) and raising our target price from $59 to $64.  Our review of the company’s growth initiatives has given us more confidence in its multichannel strategy.

In the Americas, we expect the company to ramp up new store openings and remodeling work. To help increase sales, SBUX has added La Boulange bakery products and Evolution Fresh juices to its stores. In China, we continue to see tremendous potential.

In addition, we expect improved food offerings (which account for one-third of sales), an effective loyalty program, and mobile apps to boost revenue.

Starbucks is introducing new beverages and using promotions such as “treat receipts” and social media to attract customers.

In June, SBUX announced plans to expand its Mobile Order & Pay service to 3,400 US stores. This enables customers to order before arriving at a selected Starbucks and pick up their order, saving time.

On the cost front, Starbucks has purchased nearly 70% of the coffee it needs in FY15 and we expect careful procurement to result in flat coffee costs this year.

In view of the company’s ability to introduce new products and develop its mobile business, we are confident it can surpass its FY15 EPS guidance.

Adjusting for the stock split in April, the company has raised its FY15 earnings guidance slightly. It now expects adjusted earnings of $1.55-$1.57 per share.

Driven by prospects for strong worldwide comps, particularly in the US, we are raising our FY15 and FY16 earnings estimates.

Our EPS estimates are now $1.64 for FY15 (raised from $1.60) and $1.94 for FY16 (raised from $1.88).

We rate Starbucks’ financial strength as High, our top ranking. In November 2014, Starbucks raised its quarterly dividend by 23%. Our post-split dividend estimates are $0.64 for FY15 and $0.80 for FY16.

The company’s same-store sales remain solid despite a difficult economy and we expect further growth over the next two years.

Our revised target price of $64 implies a multiple of 33.0-times our FY16 EPS estimate and a potential total return, including the dividend, of more than 20% from current levels.

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