Markets

5 Reasons Why Starbucks (SBUX) is a Gem for Your Portfolio

The restaurant industry has performed well in 2015 so far backed by an improving economy and the resultant increase in consumer spending power. Also, an overall favorable macro backdrop, characterized by a steadily improving labor market, stable energy costs and rising consumer confidence, inspires investors' optimism.

In the restaurant sector, Starbucks CorporationSBUX might be an interesting investment option right now.

Why Starbucks is a Good Choice?

Good Rank and Solid Growth Score : Starbucks has a Zacks Rank #2 (Buy) and a favorable growth style score of 'B'. The Growth Style Score combines conventional growth metrics with a thorough analysis of the company's income statement, balance sheet and statements of cash flows to evaluate its financial health and the sustainability of its growth trajectory. Back-tested results show that only stocks with a Growth Style Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best upside potential.

Rising Share Price : Starbucks' shares have had a good run this calendar year, gaining 54% year-to-date. With a market cap of $92 billion, the company is increasing its global market share through store openings in new and existing markets, remodeling existing outlets, deploying technology, controlling costs and investing in aggressive product innovation and brand building.

Strong Fourth-Quarter Fiscal 2015 Results; Positive Outlook for Fiscal 2016 : Though Starbucks' fourth-quarter earnings of 43 cents per share missed the Zacks Consensus Estimate by 2.3%, it grew 16% year over year as solid top-line growth offset lower margins. Similar to the past two quarters, the company delivered exceptional sales growth of 18% backed by consistent strong traffic trends, mainly in the U.S. Sales growth at Starbucks has been exceptional for most of fiscal 2015 driven by solid global traffic trends and higher food/beverage sales.

Beverage innovation, higher food sales and continued benefits from digital initiatives led to the solid comps in the key U.S. market.

We believe that digital efforts like Mobile Order and Pay, delivery services and third-party loyalty partnerships, food and beverage innovation, lunch and evening programs, Starbucks Reserve premium coffees and Teavana teas should fuel stronger comp growth in the Americas in fiscal 2016.

Better top-line performance backed by a range of sales drivers and various cost saving initiatives should boost earnings, making up for accelerated employee and digital investments.

New Digital Efforts : Retail companies are witnessing a shift in consumer shopping behavior away from bricks-and-mortar stores toward online shopping. Customers are consuming more food/ beverages away from home and using mobile phones for most online activities. Starbucks has secured a leading position in leveraging its mobile and digital assets and loyalty and e-Commerce platforms to capitalize on these trends to create more revenue streams.

Starbucks is introducing many technological innovations to further strengthen its brand, enhance efficiency and in-store execution and increase profitability.

Starbucks' latest digital technology, Mobile Order and Pay, is showing positive early results and could prove to be a key growth driver in fiscal 2016.

The Mobile Order & Pay service was launched last year which is now available in all U.S. company-operated outlets - more than 7,400 locations. This initiative allows customers to order before arriving at a Starbucks café and pick up the items at their selected Starbucks store, thus saving time. The service has been well accepted and is expected to soon boost loyalty program (My Starbucks Reward) membership and app usage while increasing transactions. Starbucks has started to deploy the facility in 150 stores in the U.K. and more than 300 stores in Canada and plans to continue rolling out the platform in key international markets.

Starbucks started its food and beverage delivery service through its employees at New York's Empire State building in October. The company also expects to introduce food and beverage delivery in collaboration with on-demand delivery service, Postmates, in Seattle and other office buildings in New York before the year ends.

To expand its loyalty program (MSR), Starbucks formed strategic loyalty partnerships with Lyft, Spotify and The New York Times to allow MSR members to earn stars through purchases made with these third parties; thereby generating an additional revenue stream.

Strong International Performance : Over the past two years, management has successfully turned its European business around by improving customer experience through innovative store designs, upgraded products and growing margins through process and supply chain efficiencies. Moreover, the Starbucks brand is gaining popularity across Asia as the company stepped up investments in these markets. The China and Asia-Pacific (CAP) region delivered 21 consecutive quarters of more than 20% revenue growth. Management believes that this region will drive much more meaningful business growth over the next five years supported by rapid unit growth, growing brand awareness, and increased usage of the mobile/loyalty platforms.

Stocks to Consider

Investors interested in the restaurant sector may consider stocks like BJ's Restaurants, Inc. BJRI , Carrols Restaurant Group, Inc. TAST and Dave & Buster's Entertainment, Inc. PLAY . All the three stocks sport a Zacks Rank #1.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

BJ'S RESTAURANT (BJRI): Free Stock Analysis Report

STARBUCKS CORP (SBUX): Free Stock Analysis Report

CARROLS RESTRNT (TAST): Free Stock Analysis Report

DAVE&BUSTRS ENT (PLAY): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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