Here's why record financials are likely.
Investors who bought shares of coffee giant Starbucks (SBUX -0.71%) decades ago have enjoyed life-changing investment gains. It's been one of the great stocks of the last 30 years.
However, those who bought shares of Starbucks just five years ago are experiencing lackluster performance. Even when including the positive boost from dividends, Starbucks stock is underperforming the S&P 500 by a wide margin as seen in the chart below.
SBUX Total Return Level data by YCharts.
Considering Starbucks has underperformed for this long, it's understandable if some investors want to move on in search of greener pastures. But investing isn't about where the company has been; it's about where it will be. With that in mind, where will Starbucks be in five years?
The goals are clear for Starbucks
Starbucks is already the second-largest restaurant chain worldwide -- second only to McDonald's -- with nearly 39,000 locations as of the end of its fiscal first quarter of 2024. But despite its large footprint, management remains intent on expanding the brand even more.
It's amazing how fast Starbucks is opening new coffee shops. In Q1 alone, it opened over 500. This came after the company opened over 2,300 new locations in its fiscal 2023. In short, this coffee stock aims to get bigger in a hurry.
Starbucks' fiscal 2024 will end around October of this year, and fiscal 2025 will end around October 2025. By the end of fiscal 2025, Starbucks' management hopes to have 45,000 locations worldwide. This goal is only seven quarters away, meaning that the company will need to pick up the pace to reach more than 900 new openings per quarter. And this change of pace could catch some investors by surprise.
China is a focal point of Starbucks' aggressive expansion plan. In Q1, over 30% of new store openings happened in China.
Starbucks' management has a goal beyond fiscal 2025 as well. In 2030, the company intends to have 55,000 locations. That works out to about 2,000 new store openings after fiscal 2025.
Therefore, five years from now, Starbucks could have more than 50,000 locations around the world -- an increase of more than 11,000 locations from today.
Having 11,000 additional Starbucks locations should boost revenue substantially. And assuming consumer demand remains resilient, the company should keep churning out profits. It's not unreasonable to expect all-time high revenue and profits for Starbucks five years from now. And this could very easily lead to a new high for the stock as well.
A challenge to overcome
Starbucks' revenue and earnings per share (EPS) are already at all-time highs right now as the chart below shows. But in spite of these record financial results, the stock price is down 32% from its all-time high in 2021.
SBUX Revenue (TTM) data by YCharts.
The disparity between record financial results from Starbucks and a lower stock price suggests that investor confidence is shaken. And there may be a good reason for this.
In China, Starbucks isn't performing as hoped. While it's opening new locations at a breakneck pace, they're clearly not making any impact on the company's financials as the table shows.
| Quarter | Fiscal Q1 2020 | Fiscal Q1 2024 | Change |
|---|---|---|---|
| Total China locations | 4,292 | 6,975 | +63% |
| Revenue in China | $745 million | $735 million | -1% |
Source: Starbucks' press releases. Table by author.
This doesn't appear to be an industrywide issue in China but rather a Starbucks problem. Both Yum China and Luckin Coffee are pure plays for the restaurant space in China. And both of these companies are enjoying record revenue and profit margins that are holding steady or rising.
YUMC Revenue (TTM) data by YCharts.
Here's what this means for investors: The fullness of Starbucks' growth plans are predicated on success in China. But this region has underperformed for the company for too long. If underperformance in this market continues, Starbucks' financials might not get the boost that's expected. Management could even reverse course on its growth plans there entirely.
On the other hand, Starbucks' financial results in China started to disappoint when the pandemic began. I believe results from Yum China and Luckin suggest it should have already fully bounced back. But there's still a chance that Starbucks in China will improve over the next five years.
If it does improve in China, then Starbucks' profits could really soar. That would certainly be good for the stock. I don't necessarily have a price target for Starbucks stock in 2029. But I think the most likely scenario is that the stock will be higher because of record financial results. And if China finally rebounds, then the financials could be substantially higher than today, leading to potentially above-average returns for Starbucks stock.
There are many ifs and buts on the road ahead. Starbucks should be capable of navigating these challenges, making the stock a promising buy right now.
Jon Quast has positions in Starbucks. The Motley Fool has positions in and recommends Luckin Coffee and Starbucks. The Motley Fool has a disclosure policy.
