Down 34% in 2022, the Nasdaq Compound is firmly in bearish territory this year. Rapidly rising interest rates to curb still-running inflation have put pressure on asset prices. And some experts are calling for a recession in the near future.
Major consumer brands like Starbucks (UNDER 8.48%) were not spared by the downdraft. Its shares are down 22%. But investors shouldn’t be running for the exits and waiting for stock prices to start rising again before buying. It may be time to intervene High restaurant inventory.
Starbucks is resilient
Starbucks, with its global footprint of 35,711 total stores, sells a premium product. There are many different, cheaper options that customers can choose from to get their caffeine fix, but Starbucks reigns supreme. The company has gone ubiquitous and generated record revenue of $32.3 billion in fiscal year 2022 (ended Oct. 2).
Offering customers high-priced coffee works wonders in a strong economy because people have more discretionary income to spend on nice-to-have things. But in a recessionStarbucks could be negatively impacted as consumers tighten their budgets and reduce non-essential spending. Also, in a deteriorating economic scenario, as many believe we are right now, people tend to drive and travel less, which decreases the number of times one can stop at a store. Starbucks, which reduces purchase occasions.
However, the mighty Starbucks brand cannot be underestimated as it has been able to create consumer habits around its products that are extremely difficult to break. In its last fiscal quarter (Q4 2022), Starbucks saw revenue and same-store sales jump 3% and 7%, respectively, on top of the remarkable growth seen in Q4 2021.
And the company opened 763 net new stores in the last quarter. It’s a good overall performance in what many see as a weakening global economy.
Encouragingly, in the United States, ridership increased by 1%, with the average ticket size increasing by 10% thanks to higher sales of cold drinks. In fact, traffic at US company-owned stores is now 95% of what it was before the pandemic. Same-store sales in Starbucks’ home market increased 11% year-over-year. And the company now has 28.7 million active Rewards members in the United States.
Unfortunately, it’s a different story in China, which has typically been Starbucks’ fastest growing market. Pandemic-related shutdowns have crushed business in the world’s most populous country – same-store sales fell 16% year-over-year in the last quarter.
But the management team remains very optimistic about this giant market. “In China, we will continue to rapidly expand our store footprint, with growth of around 13% expected in fiscal 2023,” said Chief Financial Officer Rachel Ruggeri. Call for Q4 2022 results.
Nonetheless, Starbucks still managed to post a strong quarter despite uneven results in its two most important markets. Looking ahead, management remains optimistic, expecting fiscal 2023 revenue to grow 11% (mid-term), with earnings per share expected to increase 15% to 20%.
Looking at the evaluation
As of this writing, Starbucks shares are trading at a price/earnings ratio (P/E) of 26, just over half the average valuation of the last five years. Also, the coffee chain is cheaper than other big restaurants like Dominos Pizza and Chipotle Mexican Grill.
If investors are looking for a way to bolster their portfolios by adding a fundamental stock to the mix, I think Starbucks is a good bet to buy and hold for the next five years. The company has become entrenched in the daily lives of its customers and has a premium brand that should perform well regardless of the macroeconomic situation.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has posts and recommends Chipotle Mexican Grill, Domino’s Pizza and Starbucks. The Motley Fool recommends the following options: short January 2023 $92.50 puts on Starbucks. The Motley Fool has a disclosure policy.
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