Digital Engagement and Drive-Thru Supporting SBUX

A year after the coronavirus pandemic first shuttered Starbucks SBUX stores in China, the company demonstrated its continued dominance in the coffee space in the first quarter of fiscal 2021, with adjusted EPS of $0.61 that exceeded both our forecast of $0.52 EPS and its own guidance. While the firm has not been completely unscathed by the pandemic, we were encouraged by the growth of its rewards program (which reinforces Starbucks’ wide moat) and the improvements already seen in the international segment, particularly in China, which has set the road map to recovery for the rest of the business. As a result, we will not be making any material changes to our fair value estimate of $100, and shares strike us as fully valued.

Overall revenue was down 4.9% this quarter, in line with our expectations. We don’t anticipate a return to positive sales until the second quarter, mainly due to the Americas segment, whose 6% decrease continued to lag the more dynamic International segment (up 5.3%). However, across the board we saw an increase in average ticket, with the Americas up 20% (partially offsetting its 21% decrease in transactions). While some of this is attributable to a temporary increase in group ordering, we expect more customized beverages to continue to drive tickets higher in coming years.

One bright spot for Starbucks in the past year has been its Starbucks Rewards program, which added 2.5 million new 90-day active members in the U.S. this quarter to total 21.8 million members, up 15% over the previous year. Similarly, China rewards members increased a record 51% over the previous year, totaling 15.1 million. The China segment is a leader in the firm’s store expansion endeavors, opening more than 160 stores (including in 15 new cities) this quarter, and achieving 13% growth in the past 12 months. We believe investors should take comfort in these positive trends as indicators of Starbucks resilience and brand strength going forward.

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