Estimated read time: 4 minutes
Publication date: 29th Mar 2022 13:29 GMT+1
There are several reasons that can trigger a bear market. These include an economic slowdown, tightening of federal bank policies, geopolitical risks, and more. A common theme in such markets is that investors look to increase exposure to low-risk asset classes including bonds or gold.
But every market correction also offers investors to buy the dip and benefit from dollar-cost averaging. You need to identify companies with a resilient business model that allows them to generate sales and profits across economic cycles. These qualities are that more important in a bear market.
The ongoing turbulence in the stock market has dragged shares of Starbucks (NASDAQ: SBUX) significantly lower. At the time of writing, SBUX stock is down 30% from all-time highs, valuing the company at $101 billion by market cap.
The bull case for SBUX stock
Despite the ongoing pullback, Starbucks has returned 275% to investors in the last 10 years, compared to the S&P 500 returns of 293% in this period. The company was hit hard amid COVID-19 as it derives the majority of sales from retail outlets.
Starbucks is among the largest coffee chains globally with a network of 34,000 stores. Its net sales in fiscal 2020 (ended in September) fell to $23.5 billion, compared to $26.5 billion in fiscal 2019.
However, in fiscal 2021 revenue rose to $29.1 billion as lockdown restrictions were relaxed and economies reopened. Similarly, the company’s net income fell from $3.6 billion in 2019 to $928 million in 2020 before rising to $4.2 billion last fiscal year.
Starbucks continued to impress investors after its sales were up 19% year over year at $8.1 billion in Q1 of fiscal 2022. Starbucks Rewards, which is the loyalty program saw a 21% surge in membership to 26.4 million. Its net income soared 31% year over year to $816 million, allowing Starbucks to increase its quarterly dividend by 10% to $0.49 per share, which was the 11th consecutive year of increase.
Starbucks remains among the top growth stocks part of the S&P 500. The company’s Growth at Scale agenda launched 18 months back should see it open new stores on the back of an international expansion plan. It intends to open 55,000 retail stores by 2030 providing Starbucks with enough room to increase sales going forward.
The bear case for Starbucks stock
While Starbucks surpassed revenue consensus estimates in fiscal Q1, its adjusted earnings per share of $0.72 were below projections of $0.80. The company explained its business remains negatively impacted by the pandemic due to temporary store closures. Yes, Starbucks is a global giant but it is vulnerable to the impact of domestic policies across countries.
For example, same-store sales in Q1 fell by 18% but in China, it fell by 14%. In fact, China has reimposed lockdowns in several provinces due to an uptick in COVID-19 cases. Further, another reason for Starbucks’ tepid earnings in Q1 can also be attributed to factors such as inflation, labor shortages, and supply-chain issues.
During the earnings call, CEO Kevin Johnson explained, “While Starbucks has always been committed to attracting and retaining the best partners with our differentiated pay and benefits package, we too experienced staffing issues. In response to this challenge and as an employer of choice, we hired an increasing number of new partners into our business this past quarter, which rapidly increased our training costs well above historic levels.”
Additionally, there were staffing shortages at the company’s third-party supply-chain partners which increased transportation costs. Starbucks management expects adjusted earnings to decline between 4% and 6% in fiscal 2022 as cost pressures are unlikely to subside soon.
Analysts tracking SBUX stock expect sales to rise by 12.7% to $32.8 billion in fiscal 2022 and by 9% to $35.7 billion in fiscal 2023. Comparatively, its adjusted earnings might expand at an annual rate of 11.5% in the next five years.
Wall Street is bullish on SBUX stock with a consensus price target estimate of $114 which is 30% above its current trading price.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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