Starbucks (NASDAQ: SBUX) investors likely felt lukewarm about the returns they saw in 2022. The coffee titan did outperform the S&P 500, but its 15% decline was still a letdown. Shareholders saw a range of discouraging news, including slowing growth, falling profit margins, and declining cash returns.
The next year has the potential to bring an encouraging shift in some of these negative trends and perhaps allow the stock to return to its winning ways. Let's take a closer look at Starbucks' prospects for 2023 and beyond.
Getting more traffic
Starbucks' main challenge in early 2023 concerns customer traffic. Sure, comparable-store sales were up 5% in the quarter that ended in early January. But that result trailed those of key rivals like McDonald's, which grew at a rate of more than 10%.
The biggest drag on Starbucks' sales has been customer traffic, which fell 2% worldwide. Yes, most of that decline was due to temporary pandemic restrictions in China. But Starbucks still posted a meager 1% traffic uptick in the U.S. market.
Management is hoping to turn that tide by pushing deeper into convenience. Starbucks intends to lean heavily on its drive-thru and delivery channels even as it adds more stores in rural locations outside of major metropolitan areas. Success here could help the sales growth rate speed back up toward the double digits.
The short-term outlook for Starbucks
The good news is that management still sees strong earnings opportunities for fiscal 2023. In early February, executives affirmed their growth and profit outlook even though pressure on consumer spending is building.
Starbucks didn't see much of an impact from that shift through January. "We don't see ourselves in a situation where we need to discount heavily," Interim CEO Howard Schultz said in a conference call with investors.
That strength allowed operating profit margin to drop just slightly to 14.4% of sales from 14.6% a year ago. The stock's path over the next year might depend heavily on whether that figure can remain stable or start climbing back toward 20% of sales.
Starbucks' valuation shows potential
Wall Street seems cautiously optimistic that Starbucks can return to its prior, stronger growth path. The stock's valuation has risen from a price-to-sales ratio of 3 in late 2022 to nearly 4 right now. These gains mostly reflect lower fears of a tough recession striking key markets like the U.S.
There's no telling how the stock might react to changing economic trends, so investors should instead keep their focus on Starbucks' broader expansion strategy. The chain enjoys dominant market share, pricing power, and plenty of customer loyalty. These factors helped it navigate through a tough selling environment in late 2022.
If Starbucks can protect those assets while extending its reach in the on-the-go niche, shareholders will likely be very happy that they held the stock through the volatility of the last several quarters. Success there should be amplified by steadily growing cash returns. Starbucks resumed its stock-buyback program this past quarter, and executives expect this spending to accelerate as the rebound gains steam.
Overall, the prospects look good for the coffee giant to beat the market again in 2023.
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Demitri Kalogeropoulos has positions in McDonald's and Starbucks. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends the following options: short April 2023 $100 calls on 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.
