American Consequences - July 2019

In just the past decade (2008-2018), its share price has soared by more than 1,200%. And the company has solidified its brand. According to Forbes ’ ranks, Starbucks’ $16 billion brand the 34th most valuable in the world. As we’ll show you, Starbucks uses that brand to generate loads of cash and create huge shareholder value. It’s a classic example of what we call a “Global Elite” stock. Today, Starbucks is a $100 billion company with more than 14,000 locations in the U.S. About 60% of those stores are company- operated. The rest are licensed or franchised. That’s one key to Starbucks’ success... You can find one of its coffeehouses just about anywhere. And you know what you’re going to get, be it in New York City or Hong Kong. Starbucks has about the same number of U.S. stores as McDonald’s (MCD). Those two companies lag behind only sandwich chain Subway, which has around 25,000 locations in the U.S. Few legal products hook their users like Starbucks’ coffee. And revenues at the company have more than doubled from about $10 billion to over $25 billion. One of our favorite parts of the Starbucks story today dovetails with a documentary we recently released on the floor of the New York Stock Exchange... China and its “New Money.” With growth slowing in the U.S., you might think Starbucks’ brightest days are behind it. They’re not. Its biggest potential market – China – is still largely untapped...

Starbucks executives are convinced that China can become the company’s largest market in the world. And we agree. The company’s goal is to operate 6,000 stores in 230 cities across mainland China by the end of fiscal 2022. It plans on adding about 600 net new stores per year in China. That’s a frenetic pace. Think of it this way... Starbucks is opening a store every 15 hours in China. With its big push in China, Starbucks will soon have more international than domestic stores. Despite slowing same-store sales growth, international expansion has fueled top-line growth. Given that China only represents about 18% of Starbucks’ $25 billion in total annual revenue, it’s an exciting time in the company’s development. Starbucks’ market cap is around $101 billion. And we believe it has plenty of room to grow due to its China expansion. China and further international expansion will continue to drive FCF at the company. Over the past four quarters, Starbucks has generated $3.4 billion in FCF – 14% of its revenue. Moreover, it has committed to returning $25 billion to shareholders through buybacks and dividends through fiscal 2020. That’s about one-fourth of its current market cap. The company returned more than $8 billion in 2018 alone. Starbucks deals an addictive drug. It has an iconic brand that it will be rapidly spreading across China for more than a decade. And its fantastic financial returns translate into stellar shareholder returns.

That’s one key to Starbucks’ success... You can find one of its coffeehouses

just about anywhere.

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July 2019

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