The company is expecting to add stores at a slower pace next year while accelerating international growth.
Starbucks (NASDAQ:SBUX) is feeling good about its new fiscal year. After the many difficulties it faced from the coronavirus pandemic, the company has been mostly upbeat when discussing its prospects. The international coffee chain had the majority of its owned and licensed stores in operation, albeit at reduced capacity, as of its latest earnings release.
Still, the company said it would achieve double-digit comparable-store sales growth in fiscal 2021. That would be a welcome turnaround for shareholders, who endured a challenging 2020 as comps decreased by 9% from the previous year. The optimism may be one reason the company is adding locations next year. But why is such a high percentage of that growth happening internationally?
Starbucks plans to open 1,100 net new stores in fiscal 2021. The increase would be 3.4% over its existing store base of 32,660 through the end of Q4 on Sept. 27. The most interesting part is that 1,050 of them are planned for international markets.
Net new stores are what’s left after total store closures are subtracted from total new openings. Starbucks is opening 850 new stores in the U.S. next year, but it’s also closing 800. The closures appear to be the result of the company’s belief that urban centers in the U.S. will suffer long-term damage because of the pandemic — as more people will be working from home.
And out of the 1,050 net new international stores, roughly 600 will be in China. The U.S. and China make up the bulk of Starbucks’ total store base, with 15,337 and 4,706, respectively. In speaking about the company’s plans in China, CFO Patrick Grismer said: “I think it was a couple of years ago at our China Investor Conference that we talked about a longer-term goal of reaching 6,000 stores in China by the end of fiscal ’22. We remain optimistic that we will achieve that number, and that does imply that following fiscal ’21, we will see an acceleration in the pace of new unit development in China.”
The focus on increasing the share of stores internationally is not a new phenomenon for Starbucks. In 2020, the company opened a net of 1,404 new stores, and 1,117 were outside the U.S.
A little more froth
There could be several reasons the company is investing more heavily in international growth, specifically in China. But certainly one of the main reasons is that the company can operate those stores at higher profit margins. Operating expenses as a percentage of revenue were 48% internationally compared with 53.2% at U.S. stores in the most recent quarter. That difference is similar when considering the most recent year, where international operating expenses as a percentage of revenue were 51.9% compared with 57.4% domestically.
This isn’t a new development for the company. Store operating costs in the U.S. were higher than international in 2018 and 2019 as well. The most significant component of operating expenses is wages. Given that minimum wages are increasing in several U.S. states, it would be reasonable to infer continued increases in wages for the next few years. It’s understandable that management would want to focus on more new store openings internationally, at least in the near term.
What this means for investors
Starbucks’ focus on increasing its proportion of stores that generate higher profit margins will incrementally increase its profits and cash flow over time. As a bonus, international markets are recovering faster from the coronavirus pandemic than its domestic market. Starbucks guides investors to expect international comps growth to be 27.5% for fiscal 2021 with domestic comps at 19.5%, both at the midpoint.
Management’s focus on faster-growing and more-profitable markets should please shareholders of this consumer discretionary stock.