After Doubling, Does Starbucks Still Have Room to Run?

In spite of economic headwinds -- which may or may not be attributable to an ongoing trade dispute between the U.S. and China -- American companies doing business across the Pacific are proving far more resilient than some expected. Starbucks (NASDAQ: SBUX) is one of them.

After a lackluster multi-year stretch the coffee giant's stock exploded and has doubled in value over the last year. For a company the size of Starbucks (with a market cap currently at $117 billion), that's a massive return in a short period of time. Granted, shares may have been undervalued before the run higher, but there's no reason to worry about the stock suddenly reversing course -- especially if its two most important markets continue to rally.

Two countries are key

Starbucks stock jumped again last week after reporting its fiscal 2019 third-quarter earnings, adding to its seemingly already impossible run. The reason? Same-store sales (a combination of foot traffic and average guest ticket size) soared 7% higher in the U.S. and 6% higher in China. Net new store growth in China was also up 16% year-over-year as the company continues to double down on the Middle Kingdom in spite of trade tensions.

A Starbucks coffee cup sitting on a counter.

Image source: Starbucks.

It all added up to an 8% and 26% increase in total sales and adjusted earnings, respectively. Given the signs of resurgence in consumer interest in the U.S. and China, it didn't come totally by surprise that the third quarter was such a good one. With three out of four fiscal 2019 reports on the books, here's where Starbucks stood during its last report by larger geographic breakdown.

Metric Americas China and Asia Pacific Europe, Middle East, and Africa
Store count 17,845 9,246 3,523
Store count YOY increase 4% 12% 9%
Comparable-store sales increase 7% 5% 3%
Year-ago comparable-store increase (decrease) 1% (1%) 0%

YOY = year over year. Data source: Starbucks.

Time to sell?

After the knockout results and surge in price, it may be tempting to sell. That could be a mistake, though. Starbucks has been hard at work fostering comparable store sales growth via its rewards program and app, along with a more focused menu aimed at luring in long-term patrons. It looks like these investments are starting to pay off -- especially in Starbucks' largest market, the U.S., which until recently had been plagued by flat foot traffic at existing locations.

Comparable store sales are an important metric for overall profitability. The more money a store brings in, the higher its profit margin. Added to the long-term growth potential China still holds (there were still only 3,922 total stores at quarter-end), it looks like Starbucks could be ready to benefit from a dual tailwind of rising comps and continued new store openings. Shares currently trade for 34.5 times management's fiscal 2019 adjusted earnings forecast -- a rich price tag, but not a totally unreasonable one if growth in these key metrics continues.

Don't get me wrong, taking some profits off of the table seems timely in light of the stellar uptick over the last 12 months. But selling out completely from a long-term winner would be a mistake, too. Just be ready to buy more dips when Starbucks hits a few inevitable growth potholes down the road.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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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