Starbucks Well-Positioned for Growth

Starbucks SBUX carried much of its momentum into fiscal 2019, with simplified store operations, improved digital engagement, and a stronger beverage assortment driving solid U.S. comps (up 4%) and delivery and digital efforts helping the company to weather a still-competitive China coffee landscape (China comps increased 1%). While there is additional work to be done with respect to the customer experience in both regions, we believe the operational, menu, and digital engagement changes Starbucks has implemented in its two largest markets--coupled with new go-to-market strategies through the Global Coffee Alliance (GCA) with Nestle--have stabilized the brand intangible asset underpinning our wide moat rating and should keep the company on track to meet--and likely exceed--the long-term goals it outlined at last month's investor day event, including 3%-4% comps (3%-4% in the U.S. and 1%-3% in China), 6%-7% net new unit growth (3%-4% U.S., midteens China), 8%-10% operating income growth (suggesting 17%-18% operating margins), and "at least 10%" EPS growth.

We're not planning material changes to our $74 fair value estimate and continue to view Starbucks as one of the most attractive names in the restaurant industry today with several potential catalysts in the pipeline (new store formats and expanded delivery capabilities). Over the next 10 years, we anticipate average annual revenue growth of 8%, factoring in roughly 2-3 points of revenue growth impact from the GCA partnership beginning in 2020, 6% average annual unit growth, and 4% global comps driven by Mobile Order & Pay and other digital initiatives, new beverage/food innovations, and restaurant throughput enhancements. Over a longer horizon, we anticipate operating margins exceeding 20% driven by sales leverage from streamlined store operations and technology initiatives, international scale improvements, and contribution from the GCA.

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