Starbucks results short-term disappointing, but long-term prospects make it a BUY

Starbucks 3 months

Starbucks 5 years

Company Profile:
Starbucks Corp is the roaster, marketer and retailer of specialty coffee in the world, operating globally. It sells a variety of coffee and tea products. It sells goods and services under brands including Teavana, Tazo, and Seattle's Best Coffee.

Disappoing Short-term Results:

Starbuck's stock price has fallen as much as 18% from its high reached on June 2, 2017. The company's recent quarterly earnings report disappointed investors.

Last quarter, Starbucks added 575 net new stores globally. Starbucks now has a total of 26,736 stores across 75 countries. Its revenues in Q3 increased by 8% from Q3 2016.

Short-term looking, Starbucks' EPS and operating margin were disappointing. Management attributed to decline in operating margin to increased investments in US store partners and lowered beverage comps combined with strong food sales (food has lower gross margin than beverage). Another factor was the closedown of 379 Teavana malls, which Starbucks has committed to close down by the Spring of 2018.

Positive Long-term Prospects:

However, Starbucks has a few initiatives to grow its business as its growth factors.

1)    The Push Towards Digital Relationships and Mobile Payment

Beside the mentioned initiatives to improve its throughput and earnings, Starbucks is continuing its push towards building digital relationships with its customers and encouraging mobile payments. 

2)    China Presents Unparalleled Growth Potential

Starbucks also has a strong growth engine that will unlock value for its shareholders in the next decade. Its comps growth was 7% in the past quarter. Its operating margin in China was 26.6%. China is Starbucks' fastest and largest international market. Now there are only 2800 stores but the company hopes to see 5000 stores by 2021. According to US Department of Agriculture, Chinese coffee consumption has nearly tripled in the past four years.

Financial Analysis of Starbucks

1. Strong revenue growth

2. Strong return on equity (ROE) :
ROE significantly exceeds that of both the industry average and the S&P 500.

3. Net operating cash flow slightly increased to 1150.60 million or 6.39% when compared to the same quarter last year.