Starbucks (SBUX 0.47%) stock is still trailing the market in 2023, but investors aren't nearly as pessimistic about its growth potential as they were just a few weeks ago. The sentiment shift was sparked by the coffee giant's fiscal Q4 report that in early November showed solid operating and financial trends, paired with an optimistic outlook for the new fiscal year ahead.
The headline results included double-digit sales growth and rising profitability even as consumers became more cautious about spending. But the best news around Starbucks' business today is that the company isn't relying solely on price increases to boost sales or earnings.
Achieving balance
The pace of sales gains slowed a bit when compared to the previous quarter. Yet the news is more positive when you look behind those big-picture results. Customer traffic in the core U.S. market accelerated to a 2% increase from a 1% uptick in the prior quarter. This was even better news considering that peers like McDonald's (MCD -0.91%) reported declining customer traffic in the same period.
In other words, the coffee titan seems to have ended its market share slide and is now back on the offense. "We finished the fourth quarter and full fiscal year strong," CEO Laxman Narasimhan said in a press release, "delivering on the higher end of our...guidance." Comparable-store sales in the U.S. sped up to an 8% increase from 7% last quarter, partly thanks to some well-received late-summer beverage launches.
Amplifying earnings
The better balance carried through to Starbucks' finances as well. Sure, price increases are still lifting sales, and that's not a trend that can continue for long now that inflation has slowed. But the chain demonstrated that it could boost earnings in other, more durable ways. For example, cost cuts made a big difference in Q4, and Starbucks became more efficient overall in its food and beverage preparation. Increasing use of the digital ordering app aided on this score while also boosting customer loyalty.
These wins helped lift Starbucks' net profit margin to over 18% of sales, compared to 14% a year ago. They propelled earnings to a 40% increase this quarter, as well. Management sees room for further gains ahead even though economic growth rates are sluggish in parts of the world right now. "We remain fully optimistic about our headroom across the U.S. and internationally," Narasimhan said in a conference call with investors.
The brighter outlook
Starbucks isn't expecting an end to this positive momentum any time soon. It's true that the company forecasts a slight slowdown in the new fiscal year as comps gains decelerate to between 5% and 7% compared to this past year's 8% boost. Yet investors were bracing for a bigger slowdown given that price increases will likely be more modest going forward.
The chain should be able to squeeze more out of that smaller sales increase in 2024. Management is projecting another year of rising profit margins ahead following last year's 1 percentage point gain. Success here should help boost earnings while providing more resources that Starbucks can direct toward dividend payments. The chain has increased that payout for 13 consecutive years at a compound annual growth rate of 20% through that time .
Yet the stock is still cheaper than it was at the start of this year. Even following the recent rally, shares are priced at 3.3 times annual sales, down from 3.6 times sales in early 2023. Investors should consider that drop as an attractive discount for a proven growth stock that has a long runway for sales expansion ahead.
