It's a solid strategy that keeps customers coming back for more...
Investing in "addictive" products and companies can lead to huge gains.
Think of things like cigarettes, alcohol, sugary sodas, and even greasy foods like cheeseburgers and fries. People keep buying these no matter what. That means reliable, steady sales for companies that sell these products.
And that usually translates into long-term gains for these stocks.
Of course, some investors avoid businesses that sell products they don't personally use or that they disapprove of... But our job isn't to pass judgment. Our job is to look for the best investment ideas to share with our readers.
Starbucks (Nasdaq: SBUX) is a perfect example of this "addictive" trend...
Caffeine is a part of millions of people's daily routines. In fact, it's estimated that Americans drink 400 million cups of coffee every day. With 64% of the U.S.'s adult population (about 165 million people) drinking coffee, that comes out to more than two cups per person.
It's not hard to see why, considering its positive side effects include increased alertness, higher energy levels, and a generally improved mood.
And Starbucks – with more than 32,000 stores across the globe (and 15,288 in the U.S.) – is perfectly positioned to take advantage of the world's coffee habit.
Over the past five years, Starbucks shares have soared, nearly doubling over that period. That includes the dramatic COVID-forced sell-off from last March. Just take a look at this chart...
By the numbers, Starbucks looks great as well...
It generated $23.8 billion in sales over the past 12 months. That's down slightly from sales in the 2019 fiscal year (Starbucks' fiscal year ends in September), but it includes the drastic impact from the early days of COVID-19 lockdowns.
A lot of this trickles down to our favorite financial metric – free cash flow ("FCF"). Put simply, FCF is the amount of cash left over after all expenses and capex.
Over the past 12 months, Starbucks generated about $3.8 billion in FCF. On $24 billion in sales, that comes out to a FCF margin (FCF divided by sales) of around 16%. That's more than the average FCF margin for the S&P 500 Index.
And with such thick FCF margins, Starbucks can reward shareholders. In November, the coffee chain raised its quarterly payout by 10% from $0.41 to $0.45. The company says this shows its confidence in its recovery and long-term business model. And Starbucks continues to generate strong cash flow.
Throughout the pandemic, Starbucks weathered the shock by investing heavily in drive-through and digital-ordering options. While these plans were already in place before the pandemic, the lockdowns sped up their timelines. As a result, Starbucks was able to keep many of its stores open and avoid the worst of the fallout.
In fact, Wall Street is predicting a sharp rebound...
For 2021's fiscal year, Wall Street estimates Starbucks to report sales of $28.8 billion. That would be 8.7% above the 2019 fiscal year. And Starbucks is getting more optimistic on its sales, too. It now sees fiscal-year revenue of $28.5 billion to $29.3 billion versus the prior range of $28 billion to $29 billion.
In an interview last week on CNBC, Starbucks CEO Kevin Johnson said that the company has seen consumer mobility – similar to foot traffic – "shoot through the roof" as more people get vaccinated. In fact, he said that Starbucks' same-store sales in areas where more people were vaccinated came in above the same period in 2019.
Johnson said that this was because governments have loosened COVID-19 restrictions in areas where more than 35% of the population has been vaccinated. Restrictions have been further eased (or are completely nonexistent) in areas that have more of the population vaccinated. This lets people get back to their normal lives with confidence.
He also said that the recovery in Starbucks' business in the U.S. is what the company expects to play out in other regions. The company is starting to see this in Mexico and parts of Europe.
In all, the rebound in Starbucks' same-store sales shouldn't be surprising. And it should only pick up from here as we approach "normal" life.
Starbucks has an extremely well-known brand and sells an addictive product. So people will keep coming back again and again for their Starbucks coffee. And as things get back to normal, this will boost sales and SBUX shares.
Sometimes investing is simple.