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Starbucks (SBUX) Benefits From Robust North America Comps

Starbucks Corporation SBUX is gaining momentum on the back of robust North America comps growth, expansion efforts and menu innovation. However, high costs and dismal China performance continues to affect the company.

Let’s delve deeper.

Growth Drivers

Starbucks’ North America comps have impressed investors for the seventh straight quarter rising 11% in the fiscal fourth quarter, owing to an improvement of 10% in average ticket. Global comparable store sales increased 7% year over year, primarily driven by an 8% rise in average tickets. For fiscal 2023, the company anticipates global comparable sales to reach the high end of 7-9% target range.

The management focuses on increasing global market share by judiciously opening stores in new and existing markets, remodeling existing stores, deploying technology, controlling costs, aggressive product innovation and brand building. In the second, third and fourth quarter of fiscal 2022, Starbucks opened 313, 318 and 763 net new stores worldwide, respectively, taking the total store count to 35,711.

In fiscal 2023, the company expects store count in the United States and China to grow approximately 3% and 13%, respectively, on a year-over-year basis. Capital expenditures are estimated to be approximately $2.5 billion. Consolidated revenues are anticipated to grow in the range of 10-12% on a year-over-year basis.

For fiscal 2023, the company anticipates non-GAAP EPS growth to be at the low end of 15-20% range.

Starbucks, which share space with McDonald's Corporation MCD, Yum! Brands, Inc. YUM, Yum China Holdings, Inc. YUMC, is strengthening its product portfolio with significant innovation around beverages, refreshment, health and wellness, tea and core food offerings.

Apart from the numerous beverage innovations, Starbucks has also been making an effort to offer more nutritional and healthy products to its customers. Meanwhile, the company’s Reserve Roastery and Tasting Room elevates the coffee experience to the next level, with small-batch super-premium coffee produced using innovative coffee-brewing techniques.

Concerns

The COVID-19 pandemic has negatively impacted the company’s performance in China. During the fiscal fourth quarter, comps in China declined 16% year over year. The downtick was caused by a 17% decline in transactions, partially offset by a 1% increase in average tickets.

China continues to battle COVID-19 resurgences and navigate through prolonged lockdowns. During first-quarter fiscal 2023, the company’s performance in China is expected to be affected by COVID-19.

Moreover, high costs continue to affect the company’s performance. SBUX’s margin in fourth-quarter fiscal 2022 was negatively impacted by inflationary pressures along with increased investments in labor growth (including enhanced store partner wages and new partner training). Reduced traffic in China (due to COVID-19-related restrictions) also added to the woes.

A Brief Review of Other Stocks

McDonald's: The company continues to impress investors with robust comps growth. In third-quarter 2022, global comps advanced 9.5%.

MCD’s increased focus on menu innovation and loyalty program expansion is commendable. The company is also undertaking every effort to drive growth in international markets. Robust digitalization is likely to help the company to drive long-term growth and capture market share.

Yum! Brands: The company has been benefitting from continued focus on off-premise channels, strategic investments in digital technology and refranchising efforts. Moreover, it has implemented various digital features in mobile and online platforms across all brand segments to enhance the guest experience. The company has been working toward accelerating its delivery services and the results have been positive so far. Also, emphasis on unit expansion efforts bode well.

Yum China: The company has been benefitting from menu innovation, unit expansion and digitalization efforts.

YUMC is gradually shifting toward digital and content marketing to expand customer base. Also, focus on logistics center openings and supply-chain security bode well. With a focus on improving customer experience and operating efficiency, the company stated continued investments in this direction.

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