Why the Bears Are Wrong About Starbucks Stock

Starbucks (NASDAQ: SBUX) saw its share price dip after its long-serving CEO and current executive chairman Howard Schultz said he would be leaving the company effective June 26. That’s at least partly because the last time he sort of left (moving from CEO to chairman) the company quickly lost its way and its stock tumbled.

Now, Schultz isn’t just leaving the CEO job — he’s stepping away from the company entirely. While he will retain the title “chairman emeritus,” that’s just an honorary position, and he will no longer sit on the company’s board. Instead, former J.C. Penney CEO Myron Ullman will become chairman, while Ariel Investments President Mellody Hobson will become vice chairman and Kevin Johnson will continue in his role as CEO.

Those changes clearly spooked investors, as shares fell after the news became public (though they nearly fully recovered shortly thereafter). The company also has its share of bears, who are worried about its relatively slow rate of U.S. same-store sales growth and question whether the company has reached saturation in its home market.

Image source: YCharts.

Two plans for growth

While Johnson has yet to fully prove his worth, he should be able to execute the growth plan the company has laid out. That includes massively increasing its presence in China.

Starbucks plans to open 600 locations a year in China to give it 6,000 stores in the country by 2022 (about twice what it has now). The company expects its operating income from China to double over that time frame, and its revenue to triple.

“No Western company or brand is better positioned to evolve with the rapidly expanding Chinese middle class — and we continue to mindfully evolve a coffee culture in China where the reward will be healthy, long-term, profitable growth for decades to come,” said CEO Kevin Johnson in a press release. “We are committed to long-term investment in China.”

In addition, the company plans to increase revenue by building out its premium brand, adding Roastery locations in some of the world’s leading cities, building about 1,000 higher-end Reserve stores, and adding Reserve bars to around 20% of the chain’s cafes.

“Starbucks Roasteries under design or construction in the iconic, global cities of Shanghai, New York, Tokyo, Milan, and Chicago will join our Seattle Roastery in delivering an immersive, ultra-premium, coffee-forward experience like none other anywhere in the world,” Executive Chairman Schultz in the chain’s Q2 earnings release.

The current Starbucks Roastery in Seattle is sort of a coffee palace, offering unique (and pricier) coffee drinks as well as higher-end baked goods from the chain’s Princi brand. Reserve bars and stores are sort of a shrunken version of the Roastery experience, offering limited-edition coffees and other higher-end experiences.

It’s hard to know exactly how much that will drive comparable-store sales, but it may bring in new customers and it should increase the check sizes of current visitors (even if only occasionally). In addition, stand-alone Reserve stores will be a new kind of experience for the chain’s customers — not quite as lavish as a Roastery, but with higher-end and more unique choices than a typical Starbucks, which should create new sales as well.

Starbucks’ Whiskey Barrel-aged coffee was a Seatle Roastery exclusive that sold out quickly. Image source: Starbucks.

Starbucks is playing a long game

Losing Schultz is a blow, as he was such an integral part of the company. Still, Starbucks has a solid plan to grow that Johnson and the new board leadership should be able to execute.

There may be some stumbles along the way — specifically with the Reserve stores, as only one currently exists — but the overall strategy is sound. Starbucks has proven that demand exists in China, and the chain has shown that consumers will spend more for better experiences, special offers, and limited-availability products. Those two things should be more than enough to push the company to steady, long-term growth.

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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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