Why I Bought Starbucks Stock Last Week

Last Monday, Starbucks (NASDAQ: SBUX) announced that longtime leader Howard Schultz will retire from the company and leave the board later this month. Schultz had already given up the CEO title last year, but he has remained active with the company since then, focusing on expanding the super-premium Starbucks Reserve brand.

Not surprisingly, Starbucks stock fell after Schultz’s departure was announced. Indeed, he has been a critical part of the company’s enormous success over the past three decades. However, Starbucks is still likely to be successful without him. Furthermore, the stock’s recent struggles have removed its historical valuation premium. This encouraged me to buy some Starbucks stock last week.

The foundation is in place

The first time Schultz stepped back from a day-to-day role at Starbucks — way back in 2000 — the company eventually lost its way. It expanded too fast and allowed its brand value to erode. Schultz reclaimed the CEO post in early 2008 and led an impressive turnaround.

Howard Schultz led a turnaround at Starbucks beginning in 2008. Image source: Starbucks.

There is certainly some risk that something like this will happen again. However, I don’t think it is likely anytime soon — primarily because Schultz has left Starbucks with a strong core business and a promising growth plan.

Declining traffic across the retail industry represents Starbucks’ biggest challenge in its home market right now. The company isn’t getting as much “walk-by” traffic as it used to, so finding new ways to entice customers to visit its cafes is of critical importance.

Starbucks has responded by investing heavily in technology, particularly its mobile app. The app helps Starbucks deliver targeted offers to customers, while speeding up service through its mobile order and pay functionality. Starbucks recently began allowing customers to order and pay ahead of time even if they don’t have a preloaded Starbucks card.

Meanwhile, Starbucks is working to deliver a more unique customer experience by building a network of Starbucks Reserve Roasteries and cafes. These stores will sell super-premium coffee (at a higher price point) and freshly prepared food. The company is also adding Starbucks Reserve coffee bars to many of its existing cafes.

The Starbucks Reserve brand is a key piece of Starbucks’ domestic growth plan. Image source: Starbucks.

Finally, while Starbucks has to work hard to keep growing in the U.S., it is just scratching the surface of its potential in China. The company is adding stores at a rapid pace and it could conceivably continue doing so for decades.

Starbucks stock is cheaper than it has been in years

While Starbucks has a good chance of successfully executing Schultz’s vision, it also helps the investment case that expectations are fairly low. Starbucks stock currently trades for 23 times its projected fiscal 2018 earnings per share, whereas it has often traded for 30 times forward earnings.

Starbucks lowered its long-term earnings growth target last year. However, if it can meet its plan of growing EPS by 12% or more annually for the foreseeable future, Starbucks stock will turn out to be a steal at its current price.

Additionally, some of Starbucks’ future EPS growth is more or less locked in, thanks to the company’s recent deal to sell its consumer packaged goods business to Nestle. It will receive $7.15 billion of cash up front, most of which will be used for EPS-boosting share buybacks. It will also benefit from royalties and supply agreements going forward.

Can Starbucks stay on track?

While Howard Schultz stepped back in to fix Starbucks after it got into trouble a decade ago, investors can’t count on him doing the same if a similar situation occurs in the future. Thus, owning Starbucks stock today means betting that the company’s new leadership can keep the ship moving in the right direction.

I’m optimistic that Starbucks can thrive without Schultz in the driver’s seat going forward. The company’s revenue has grown more than tenfold since 2000 and it has a much deeper bench of experienced leaders today than it did even a decade ago. Furthermore, as noted above, Schultz has already played a key role in developing Starbucks’ strategy for the next several years.

Starbucks will inevitably confront new challenges in the future. However, the company’s strong, well-established brand and its technology leadership should help it solve whatever problems it may face. Thus, Starbucks stock has what it takes to provide market-beating long-term returns.

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Adam Levine-Weinberg owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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