➡️ Although we do outline some of the latest news as of the date of this post, this review will help you determine if this stock is a good buy, sell, or hold. Our goal is to help you understand the company, where the company is going, the competition, and the leadership. Keep in mind, investing is more than just numbers. It’s wise to look past the numbers and look at the business. This review does exactly that.
Starbucks is a global coffeehouse chain founded in 1971, headquartered in Seattle, WA, and has 33,000 locations in 80 countries.
Table of Contents
- Tykr Rating
- Starbucks Company History
- Starbucks Business Model
- Starbucks News
- Starbucks Competition
- Starbucks 4Ms
- Starbucks Financials
- Is Starbucks stock a good buy?
- Summary: Overpriced
- Score: 39/100
- MOS: 0%
- Share Price: $84
- Sticker Price: $85
- In 1971, Starbucks was founded by Jerry Baldwin, Zev Siegl, and Gordon Bowker at Seattle’s popular Pike Place Market where they only sold coffee beans and no drinks. The trio was inspired to sell high-quality coffee beans by entrepreneur Alfred Peet. They originally named the company Starbo, a mining town in the Cascade Mountain Range, but later renamed the company to Starbucks.
- In 1973, Alfred Peet stopped supplying Starbucks with coffee beans and helped train roastmaster, Jim Reynolds.
- In 1984, Starbucks purchsed Alfred Peet’s Coffee.
- By 1986, Starbucks had six stores in Seattle and just started selling espresso coffee.
- In 1987, the owners, Jerry Baldwin, Zev Siegl, and Gordon Bowker, sold Starbucks to the former director of marketing, Howard Schultz. Schultz immediately rebranded the company. That same year, Starbucks opened its first locations outside of Seattle in Waterfront Station in Vancouver, British Columbia and Chicago, IL.
- By 1989, 4 Starbucks stores existed across the Pacific Northwest and Midwest and the company was roasting more than 2M pounds of coffee annually.
- In 1992, Starbucks went public. At the time, it had 140 stores, revenue of $73.5M, and a market cap of $271M. 12% of the company was sold when the company went public which raised enough capital for Starbucks to double the number of stores over the next 2 years. That same year, the share price went up 70%.
- In 1994, Starbucks acquired The Coffee Connection, gaining the rights to use, make, market, and sell the Frappuccino beverage. The name was officially introduced under the Starbucks name in 1995 and by 2012, Starbucks had annual Frappuccino sales of over $2B.
- In 1999, Starbucks began experimenting with eateries in the San Francisco Bay Area through a restaurant chain called Circadia. The company soon named these locations Starbucks Cafés.
- In 2003, Starbucks acquired Seattle’s Best Coffee and Torrefazione Italia from AFC Enterprises for $72M. The deal gave Starbucks another 150 stores and better wholesaling capabilities.
- In 2006, rival coffeehouse Diedrich Coffee announced that it would sell most of its company-owned retail stores to Starbucks, including most locations of Oregon-based Coffee People.
- In 2008, Starbucks started a community website, My Starbucks Idea, designed to collect suggestions and feedback from customers.
- In 2008, Starbucks acquired Coffee Equipment Company, which manufactured the Clover Brewing System. It began testing the “fresh-pressed” coffee system at several Starbucks locations in Seattle, California, New York, and Boston.
- In 2008, during the Great Recession, Starbucks announced it was closing 600 underperforming stores and removing 1,000 non-retail jobs.
- In 2009, Starbucks announced the closure of an additional 300 underperforming stores and the elimination of 7,000 positions. CEO, Howard Schultz, announced that he had received board approval to reduce his salary. Altogether, from February of 2008 to January of 2009, Starbucks removed approximately 18,000 jobs and 977 stores.
- In 2012, the largest Starbucks in the US opened at the University of Alabama’s Ferguson Centre.
- In 2013, Starbucks began to post calorie counts on menus for drinks and pastries in all US stores.
- By 2013, more than 10% of orders were made with a mobile device.
- In 2013, Starbucks utilized Twitter with a program called Tweet-a-Coffee. This program allowed customers to purchase a $5 gift card for a friend by typing @tweetacoffee and the friend’s handle in a tweet. Over 27,000 people participated.
- In 2014, Starbucks transitioned from a singular worldwide brand to local relevant designs for each store.
- In 2014, Starbucks announced ongoing losses in the Australian market, which resulted in all remaining stores being sold to the Withers Group.
- In 2018, Starbucks announced that it was considering the use of blockchain technology with an idea to connect coffee drinkers with coffee farmers. The pilot program started with farmers in Costa Rica, Colombia, and Rwanda in order to develop a new way to track the cup journey.
- In 2019, at the Microsoft Build Conference, the “bean to cup” program used Microsoft’s Azure-based blockchain service.
- In 2019, Starbucks announced that it would no longer be selling newspapers, grab-and-go snacks, and bags of whole-been coffee in cafés.
- In 2019, Starbucks opened its largest store ever on Michigan Ave, Chicago, with 200 employees.
- In May of 2020, due to Covid-19, Starbucks closed all café-only stores in the US for two weeks. At that time, only drive-thru and delivery services were open. Starbucks also paid all workers for 30 days no matter if they worked or not. The lockdown caused Starbucks to see a 10% decline in sales in the US and 50% decline in sales in China.
- In June of 2020, Starbucks closed 400 stores in US and Canada and announced it would be opening 300 stores primarily focused on carryout and pickup orders.
- In December of 2020, Starbucks announced it was planning to expand from 33,000 stores in 2022 to 55,000 stores in 2030.
- In August of 2022, after months of suspension due to the Russia/Ukraine conflict, Starbucks sold all of its stores in Russia. These stores were rebranded to Stars Coffee.
How does Starbucks make money?
- Beverages – 63% of revenue is generated from beverages.
- Food – 17% of revenue is generated from food.
- Other – 20% of revenue is generated from other products.
26% of all orders are now made from a mobile device.
This article from nypost.com states that Starbucks is planning to spend $450M in the next year to make its North American stores more efficient and less complex. Starbucks plans to open 2,000 new stores by 2025 which will include drive-thru checkouts. Today, over 50% of US sales are completed through Drive-thrus. This article also talks about the popularity of customizable cold drinks which make up 75% of beverage revenue. Customizable drinks are taxing and time-consuming and Starbucks is implementing processes and technology to cut an average of 50 seconds off each drink order. Over the duration of a full day, that will allow Starbucks to sell significantly more drinks. As stated by COO, John Culver, “It’s clear that our physical stores have to change. They were built for a different era.”
This video from Yahoo Finance further emphasizes the improvements Starbucks will be making including new technology and an improved loyalty program. Starbucks also plans to invest $220M in the expansion of China stores over the next three years.
This article from cnbc.com states that Starbucks is not only focused on improving efficiencies to help increase sales but to also reduce pain for employees. A lot of Starbucks employees have complained about being understaffed and overworked. With new technology and processes, stores can operate with fewer staff which will increase the profitability per store.
This article from gsrmag.com states that Howard Schultz will be mentoring Laxman Narasimhan as the new CEO, effective October 1, 2022. Schultz will continue to serve on the board of directors. Narasimhan brings 30 years of experience with consumer brands including Reckitt (Air Wick, Clearasil, Durex, Lysol, and more), PepsiCo, and McKinsey & Company.
These two articles below don’t relate directly to Starbucks but they do relate to why more younger people are deciding not to work. This information is referenced later in the article.
This article from pewresearch.org states 19% of non-retired US adults voluntarily left their job in 2021. The reasons for quitting include low pay, no opportunities for advancement, and disrespect in the workplace.
This article from cnbc.com states that significantly more high school students are deciding not to work a part-time job. In 1979, 60% of American teens worked and in 2022, 35% of American teens work. The reason is not because of laziness, but because high school classes and homework have become more demanding. This creates an issue because a lot of restaurant service jobs hire teens to work part-time jobs.
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- Summary: Overpriced
- Score: 39/100
- MOS: 0%
- Share Price: $87
- Sticker Price: $88
- Revenue: $29B
- Stores: 33,000 in 80 countries
- Summary: Watch
- Score: 50/100
- MOS: 0%
- Share Price: $254
- Sticker Price: $257
- Revenue: $23B
- Stores: 38,000 in 100 countries
Starbucks also has numerous private competitors including:
- Dunkin Donuts (11,500 stores in 35 countries)
- Tim Horton’s (4,600 stores in 13 countries)
- Costa Coffee (4,000 stores in 32 countries)
- Caribou Coffee (718 stores in 10 countries).
- Peet’s Coffee (339 stores in 1 country, the US)
❌ MOS: The financials are awful. It’s very clear the company needs to make some changes. When you take a closer look at the financials, you can see that revenues are flat, net income and EPS have declined, free cash flow is flat, and assets are declining.
✅ Meaning: It’s important to point out that Starbucks has survived the great recession and thrived through the 2010’s. Starbucks has a history of making positive and impactful changes to its business and product line. It will be exciting to see how Starbucks changes it’s model over the next 1 – 2 years.
✅ Moat: Starbucks has a strong brand moat. With its distinct burnt coffee smell and aggressive marketing techniques, Starbucks is actually the most popular coffee brand around the world. It is also one of the most expensive coffee brands which tell you that consumers are willing to pay more for a coffee choice they love. Second to Starbucks is Dunkin’ Doughnuts with one third of the stores and a cheaper coffee option. McDonald’s is also a big competitor with its low-priced coffee but poled consumers state that Starbucks and Dunkin Donuts coffee still taste better. After Starbucks, McDonald’s, and Dunkin Donuts, the competition quickly thins out around the globe.
❌ Management: This article from cnbc.com talks about how Howard Schultz, former CEO, went from the projects to creating a $3B fortune. This is an incredible “rags to riches” story where he grew up extremely poor. His family had no income, no health insurance, and no worker’s compensation. He used the pain of his youth to create a company that takes care of its employees. In 1987, he introduced health care coverage to part-time employees. In 1988, he introduced health care coverage to domestic partners of full-time and part-time employees. In 2014, he introduced the Starbucks College Achievement Plan which allows employees to earn a full tuition bachelor’s degree from Arizona State University. Starbucks plans to help 25,000 employees obtain a free bachelor’s degree through this program. Schultz served as CEO from 1986 to 2000, 2008 – 2017, and 2022. In other words, he’s returned to serve as CEO two additional times to “right the ship”. The Glassdoor rating of Starbucks is 3.8 and the CEO approval is 61%. When diving into the reviews, there were comments made on low wages, high turnover, and poor store management. To me, this is not a direct reflection on Schultz and more of a problem with the great resignation as well as the difficulty of finding employees. From my standpoint, Schultz has done an excellent job and it’s great to see a plan is in place to improve technology and processes to make store tasks easier for employees. The big question is, how will the new CEO, Laxman Narasimhan perform? I see he has good experience with consumer brands like Reckitt and PepsiCo but those products are sold through distributors. Starbucks is a different model as all sales are generated from physical stores. How will Narasimhan execute on the plan to make stores run more efficiently? And how will he motivate more part-time workers to join the company? If he has to increase wages, that means the company’s net income and EPS may decrease. If he wants to improve the work environment at stores, that means he has to get closer to and spend more time with store managers to weed out bad managers and bring in new managers. Overall, he has a lot of work ahead.
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Now let’s take a look at the financials. A wise investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.
Revenue (Found on the Income Statement)
- 2018: $24.7B
- 2019: $26.5B
- 2020: $23.5B
- 2021: $29B
- The revenue has remained somewhat flat.
Net Income (Found on the Income Statement)
- 2018: $4.5B
- 2019: $3.6B
- 2020: $928M
- 2021: $4.2B
- The net income has substantially increased in 2021 which is a great sign. However, if you look at the quarterly statements, the revenue has remained flat over the last few quarters.
EPS (Found on the Income Statement)
- 2018: 3.45
- 2019: 2.92
- 2020: .79
- 2021: 3.56
- EPS has increased in 2021 but has remained flat over the last few quarters.
Free Cash Flow (Found on the Cash Flow Statement)
- 2018: $9.9B
- 2019: $3.2B
- 2020: $114M
- 2021: $4.5B
- Free Cash Flow has significantly increased in 2021 but when you take a closer look at the quarters, the free cash has declined.
Total Assets (Found on the Balance Sheet)
- 2018: $24.1B
- 2019: $19.2B
- 2020: $29.3B
- 2021: $31.3B
- Total Assets have slowly increased which is a good sign.
Total Liabilities (Found on the Balance Sheet)
- 2018: $22.9B
- 2019: $25.4B
- 2020: $37.1B
- 2021: $36.7B
- Total Liabilities have decreased which is a good sign.
Total Debt (Found on the Balance Sheet)
- 2018: $9.4B
- 2019: $11.1B
- 2020: $16.3B
- 2021: $23.6B
- Total Debt has significantly increased. This is most likely due to loans to open new locations.
Total Equity (Found on the Balance Sheet)
- 2018: $1.7B
- 2019: -$6.2B
- 2020: -$7.8B
- 2021: -$5.3B
- Total Equity has gone negative which means the liabilities exceed the assets. This is a major red flag.
Starbucks has been a well-known stock found in a lot of ETFs, index funds, and mutual funds. Over the last 5 years the stock has returned about 135% with an annualized return of 18% (when it reached its all-time high in July of 2021). If Starbucks wants to continue returning value for shareholders, it needs to make some changes to its operations. I will add this stock to my watchlist to keep an eye on those changes.
The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.
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