One of the biggest worries for Starbucks (NASDAQ:SBUX) and other coffee purveyors is the state of coffee itself. Without the coffee bean, it has no business, and SBUX stock is worthless.
Nobody wants that.
At least not the company’s executives in Seattle. So, to maintain a product supply threatened by climate change, Starbucks is developing arabica varietals that do better in warm climates.
“‘Some of the varietals that we’re working with and testing are seeing their harvest in [a] two-year cycle,’ instead of three or four years, said Michelle Burns, executive vice president of global coffee, social impact and sustainability for Starbucks. If all goes well, that means more coffee more quickly, a win for Starbucks and its suppliers,” CNN Business reported in early October.
The issues surrounding coffee beans and climate change are real. The company highlighted concerns about the future cost and supply of arabica beans affecting its business in the risks section (pg. 17) of its 2022 10-K.
The revenue and profit growth continue unabated for now, making Starbucks stock an attractive buy before the end of 2023. However, it’s an issue to continue to watch in 2024 and beyond.
The SBUX Stock Valuation
Starbucks stock is down more than 8% year-to-date. It’s been an up and down five years, with its shares twice trading near $120 (July 2021 and April 2023) combined with times where it fell into the $70s (March 2020 and June 2022).
Because of the rollercoaster ride, its five-year return is just 44%, 800 basis points less than the S&P 500. If you’ve owned Starbucks for decades, you know what a performer SBUX stock has been.
Despite delivering healthy profits, its shares remain stuck in neutral. For example, its earnings yield (the inverse of the P/E ratio) is 3.54%; it hasn’t been this high since 2018. As for its PEG ratio (the P/E ratio divided by its projected earnings per share growth for the year), it’s 1.38, lower than it’s been in the past decade.
Starbucks reports Q4 2023 results on November 2. I’d see how much free cash flow it generated in 2023. Through July 2, it was $2.43 billion, 22% higher than $2.0 billion a year earlier.
Howard Schultz’s Job Is Done
Schultz, who’s spent 41 years working with Starbucks, returned in March 2022 to serve as interim CEO to run the company until he and the board found a replacement for the departing Kevin Johnson.
Narasimhan spent six months learning the business, including working as a barista in its stores, before officially taking the reins on March 20. Schultz stepped down from his interim CEO position and then the board six months later.
The Starbucks we know today would not exist without Schultz’s vision and guidance. He will always be associated with the company. But now, it’s Narasimhan’s time to shine.
With some of the company’s best growth in China and other parts of Asia, it’s got a CEO who’s from the region and probably understands its differences better than most. It was an exceptional hire.
China’s Slowly Coming Back
As of July 2, Starbucks had 6,480 stores open in China, accounting for 17% of its 37,222 stores worldwide. It opened 588 net new stores in the quarter, pushing it over the 37,000 threshold.
I noticed in its Q3 2023 press release that 49% of its global stores are licensed instead of company-operated. Their revenue is coming on strong. In the third quarter, licensed revenues were $1.14 billion, 18.8% higher than a year earlier. They accounted for 12.4% of its overall revenue, 70 basis points higher than a year earlier.
Back to China, its same-store sales rose 48% year-over-year as the country started to return to normal after the pandemic. Most of the gains were from increased transactions, a sign the traffic was returning. However, it will want to do something about the 1% decline in average ticket. It needs both moving in the right direction to succeed in China.
Pay attention to what the company says about China in its events surrounding the release of Q4 2023 results—especially the comments in its conference call with analysts.
I believe they’ll be positive. SBUX is a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.