Word on Wall Street: SBUX's Tech Initiatives Expected to Drive Continued Growth

Word on Wall Street: A former Wall Street analyst discloses the topics that equity analysts and hedge fund managers are currently talking about. 

 

Key Issue 1: Mobile Order & Pay and its impact on sales

Starbucks has driven same store sales growth of 5%+ for several years, driven in part by increased store openings (younger stores comp at higher rates) and improved food and beverage offerings. What will drive sustained 5%+ comps for the next year?

 

In addition to its core beverage offerings and food sales, many analysts expect Starbucks's tech initiatives to be a major source of revenue upside. Starbucks has one of the most widely-used apps in retail (with ~15-20% of total sales coming from the mobile app), which allows users to pay at a register by holding the phone screen to a scanner. Last month, Starbucks rolled out new Mobile Order & Pay capabilities, allowing users to order and pay without getting in line. This capability is currently in all U.S. stores, representing over half of its total global store base. 

 

Why are analysts so excited by Mobile Order & Pay? Increased usage of the new capability will provide several benefits. First, mobile order and pay increases throughput. Fewer people are required to take orders and check people out at the cash register. The freed up resources can then be used to make drinks and get more customers through the door. This should provide meaningful benefits to same store sales. Equity analysts believe that an incremental 1-3 transactions per peak hour could drive same store sales gains of 50-200 basis points.  

Source: http://www.tamucc.edu/marcom/news_releases/2012/february/starbucks_opening/

Source: http://www.tamucc.edu/marcom/news_releases/2012/february/starbucks_opening/

 

Secondly, customers that order through mobile apps tend to spend more than other customers. While this might seem counterintuitive, apps allow for suggestive selling of other items (food, coffee beans, etc.), which could increase ticket size. Transactions from LevelUp (a mobile payment app that is already in certain restaurants) have been on average 20% higher than a transaction conducted in-store. 

Third, the app provides an additional customer touchpoint and could drive customer loyalty through its rewards program. The app currently gives customers a free drink for every 10 orders. This could drive additional sales gains as customers are incentivized to come back to Starbucks for each cup of coffee they order.

In addition to the sales benefit, the Mobile Order & Pay capability may also provide margin benefits. Each sale is incremental, and therefore would have a high contribution to overall company margins. Analysts estimate that the bottom-line impact for FY16 could vary from $0.02 to $0.06 (representing a 1% - 3% benefit to EPS).  Further upside exists with increased consumer adoption of the app and if the increased ticket sizes come to fruition.

Thus, with much of the discussion focused on the Mobile Order & Pay opportunity, a key topic among investors will be the adoption rate of the new capability and its impact on the operations of the business.

 

Key Issue 2: Next Thursday's 4Q report

Analysts have high expectations going into Starbucks's 4Q earnings results next Thursday. In terms of sales, consensus estimates look for a ~7% same store sales number, driven by new and seasonal products as well as continued growth in food sales. Additionally, investors will be looking for positive commentary and a slight contribution from the recently rolled out Mobile Order & Pay capability detailed above.

For bottom-line, consensus estimates stand at $0.43, while Starbucks management guided to 4Q EPS of $0.42 - $0.43. 

 

Key Issue 3: Valuation is not inexpensive

Starbucks is not inexpensive as it trades at 35x NTM EPS, a five-year high. The bull thesis behind the high multiple is the high visibility into 15-20% EPS growth over the next five years, its consistent track record of execution (see comp performance above), its innovation in food, beverages, and technology, and its numerous initiatives to drive further sales and margin growth. Offsetting those positives is the threat of increased competition, a consumer slowdown (which may delever margins at a greater rate than other retailers given SBUX's higher labor costs and recent tech spend), and high investor expectations.