Morningstar

Starbucks' Long-Term Cash Flow Drivers Intact

We view Starbucks as one of the most attractively priced stocks in the consumer space today.

Securities In This Article
Starbucks Corp
(SBUX)

We walked away from

While the move to a dollar-based loyalty program (and subsequent shift in behavior away from order splitting and toward order consolidation) will continue to pressure transaction trends by roughly two points over the first half of fiscal 2017, the more pertinent takeaway for investors is that Starbucks has not seen a material decline in store spending due to these changes (evidenced by the 6% increase in average ticket this quarter). Admittedly, Starbucks isn't immune to the softening traffic trends we've seen across much of the restaurant and retail categories, but we believe the company is making the appropriate investments to enhance its future cash flow drivers. Among the initiatives we're most optimistic about are Starbucks' mobile platform (which should lead to store throughput and one-to-one marketing benefits), new premium Roastery and Reserve store formats, and new channel diversification opportunities (particularly new partnerships that expand its international CPG footprint), each of which has positive top-line and margin expansion implications. In our view, these efforts reinforce our 10-year forecast calling for average revenue growth of 9% and adjusted operating margins exceeding 24% (versus 19.9% in 2016).

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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