Positive Takeaways, Some Disappointments With Starbucks

Heading into

First, adjusted U.S. comps featured a 1% increase in traffic, the best performance in six quarters and still ahead of low-single-digit declines across much of the industry. While we're not anticipating a return to the 7% U.S. comps average from fiscal 2012-16, we see a path to the 3%-5% longer-term comp guidance, including opening mobile order and pay to nonmembers of Starbucks' loyalty program, new beverage/food innovations, daypart expansion, streamlined restaurant operations, and eventually, new upscale restaurant formats. Second, we're reaching the point where China (8% comps) is large enough to be a major growth engine. As we discussed in our last note, we believe prior goals for the China/Asia-Pacific region--including $6 billion in revenue by fiscal 2021--are still in play. Lastly, Starbucks has quietly become an under-the-radar capital allocation story, including plans to return $15 billion to shareholders in dividends and buybacks over the next three years (funded in part by recent ownership transactions and increased leverage). While we acknowledge Starbucks' recent uneven results, we don't think the stock deserves to be trading at a discount (23 times next year's adjusted EPS of $2.30-$2.33) to QSR players (26 times).

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