Starbucks Is Looking a Bit Bruised After Last Week

Starbucks (NASDAQ: SBUX) is one of those love-it-or-hate-it companies — you don’t find a lot of people ambivalent about its coffee. There have always been more than enough fans of its brew, though, to keep it profitable and growing.

However, as host Chris Hill and senior Motley Fool analysts Jason Moser, David Kretzmann, and Ron Gross note in this segment from the Motley Fool Money podcast, even the bean king can hit a slump. So, yes, it’s closing a few more underperforming stores than it usually does, but did the market punish it excessively? Is this a buying opportunity, and what are its best moves from here?

A full transcript follows the video.

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This video was recorded on June 22, 2018.

Chris Hill: Starbucks’ management left shareholders with a bitter taste this week. Starbucks lowered sales guidance, announced it would be slowing the number of store openings, and that they’ll be closing 150 company-owned stores next week. Jason, that is three times the number of stores that they typically close in a year. This is a bad week.

Jason Moser: Yeah, but Howard Schultz just got out in front of us and said, “Hey, listen, the stock is undervalued. It’s a buying opportunity.” Now, he knows one or two things about the business.

Hill: It’s certainly 10% cheaper than it was at the beginning of the week.

Moser: [laughs] It is. It was interesting, I asked a bit of a rhetorical question on Twitter the other day in regard to their loyalty program. I’m just befuddled by the fact that they only have 15 million active U.S. rewards card members. To me, that seems very low. Panera, over a year ago, before they went private, had around 25 million. I mean, listen, I’m one of those donks that opens my app, goes in to buy the coffee, and I realize every once in a while that I get a free one. I don’t give it a lot of thought.

Ron Gross: A befuddled donk. [laughs]

Moser: But it was interesting to see the responses I got on Twitter. There are a lot of people out there that had a lot of feedback in regard to the rewards program. My point was, if I’m Kevin Johnson, I’m looking at that as very low-hanging fruit, and I’m figuring out a way to double that number, from 15 million to 30 million, over the coming year.

Based on all of the feedback I got from the good folks on Twitter, there are a lot of opportunities, I think, they have to make that program better. That is an instant traffic driver. China’s always going to be there. Let’s not use slowing comps for a quarter as a real reason to sound the alarms. I really do feel like the rewards program could use some fixing, and that would be an easy one.

Hill: I’m not saying that they shouldn’t be slowing the store growth, and I’m not saying they shouldn’t be closing underperforming stores. But, taken altogether, David, this is a bad week.

David Kretzmann: Yeah, not ideal. Still, 150 stores compared to, what, how many stores? Close to 25,000-30,000 now?

Gross: 1 billion stores, they have.

Kretzmann: Just about. They’ll have a store for every person in the world at this rate. In the grand scheme of things, it’s actually not a huge deal. But, obviously, for this week, it’s painful. But, I agree with Jason. I think the mobile app and that whole digital payment experience, that’s low-hanging fruit. When I look at Starbucks today, there are so many different levers the company can pull. You have iced beverages, food, the premium Roastery and Reserve brands. Taken all in all, you have a stock now trading for a forward P/E of about 20X. You also have a dividend yield close to 2.5%. I look at this as a buying opportunity. I agree with Howard Schultz.

Gross: I just want to go on record and say, about ten years ago, I told my wife that there were too many Starbucks, and they would need to close some. I just wanted to go on record as saying I was right.

Moser: You really went out on a limb there, didn’t you, Ron?

Gross: [laughs] Yeah.

Chris Hill owns shares of Starbucks. David Kretzmann owns shares of Starbucks and Twitter. Jason Moser owns shares of Starbucks and Twitter. Ron Gross has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks and Twitter. The Motley Fool has a disclosure policy.

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