The key point of the fundamental analysis of Starbucks
- Reckless buyback is the factor why we do not buy Starbucks.
- We are happy when Howard Schultz takes the Starbucks helmet and decides to suspend that buyback program.
- But when he said that the suspension is just a pause (Schultz wants to resume the repurchase program) We worry that this pause is just a lips service to calm the Starbucks worker.
- Revenue and earnings have surpassed the pre-COVID level. It is a good sign.
- Starbucks has a decent competitive advantage in its brand. It creates a unique user experience – also a story. Something that almost no other ‘restaurant’ could replicate. Even with its mediocre coffee.
A cup of coffee at one time:
Fundamental analysis of Starbucks needs to clarify some capital allocation issues.
At a glance, Starbucks (SBUX) is a perfect investment. It keeps opening new stores which means a new source of growth. It buys back its shares, tipping the stock price up. Its competitive advantage is unmatched. But all of this glory isn’t enough for us to buy Starbucks due to its reckless capital allocation.
During the 2017 to 2021 period, the Seattle-based coffee maker generated cumulatively 28 billion cash from its business but spent more than double of that amount to buy back its share – as you can see in the figure at the beginning of this article.
Starbucks simply lives beyond its mean. And it comes with a cost. During the same period, the long-term debt ballooned from 4 to 13.6 billion.
So, when Howard Schultz – one of the men who write the Starbuck story – come to replace Kevin Johnson, we were enthusiasts. Mr. Schultz does not allergic to buy-back, and we’re okay with that as long as it is done proportionally. During his previous tenure, 2008 – 2016, Schultz decided to pour just 6 billion.
Mr. Schultz’s strategy to suspend the buyback gives room for Starbucks to focus on its worker and store – the component that is vital for more stable value creation for all stakeholders in the long-term according to the CEO.
The Real Story: One lips service at one time
Schultz the Savior maybe just do a lips service. The suspension was just to calm the stormy situation faced by Starbucks.
Starbucks is under pressure from its labor that demands more benefits, wages, facility. They also criticized a buy-back program that benefits only the executive and shareholders. Schultz’s suspension is Starbucks’ answer to shut them up. This speculative analysis is strengthened by the fact that management wants to resume the buyback for the next three years with 20 billion.
The old Starbucks.
Earn much, spend more.
And we could end this article here – but let’s learn more.
Fundamental analysis of Starbucks based on the revenue.
Apart from the disappointing capital allocation by the management, Starbucks performs very well. The coffee maker was hit severely by pandemics in 2020. The revenue was down from 26.5 billion to 23.5 billion, and earnings free fell from 3.4 billion to 1.6 billion from a to c. The physical distancing successfully sealed the people at home and restricted the gathering activities.
But thanks to the vaccines. Starbucks reincarnates and finds new life again.
In 2021, it generated 4.7 billion in earnings and 29 billion in revenue – more than what it had achieved in the pre-COVID era. That means the business is all right. The pandemics are just temporary trouble.
The unique proposition for tired workers:
The story, the ambiance, the warmth.
Starbucks’ value proposition for the consumer is unique. It tries to become a place between your home and workplace. Unique proposition, home, workplace. It has a story about caring for the environment and banning plastic straws. Its place is designed and crafted carefully, creating a warm unique user experience for anyone who comes into the store.
As a result, it grows fast.
In 2021, Starbucks expansion added 1,173 stores, continuing its 1,404 new stores in 2020. This pace leaves McDonald’s and Subway, the two biggest fast food chains, behind.
And it is just beginning, especially outside the US. The coffee maker plans to open at least 2,000 net new stores globally in fiscal 2022.
The conclusion of fundamental analysis of Starbucks
- Management is our game changer. In the long run, excessive buyback that drains retained earnings will destroy value. We had covered that issue here.
- Starbucks’ market cap is at almost 100 billion (August 2022). A littleBit pricey, but it is fine when we look at its fast expansion and unique competitive advantage. But again, management spends too much.