The name is synonymous with coffee nowadays, but that wasn’t always the case. Starbucks (NASDAQ:SBUX) was an obscure regional coffee chain when it went public in June of 1992. Back then, it barely had 100 stores. Now, it has 32,000 locations in its global empire.
Shares of Starbucks hit Wall Street at $17, meaning that a $10,000 investment would have bought you a cool 588 shares. And if you were patient and disciplined enough to hold all these years, you’d have a fortune now — as you’ll see in more detail below.
But how could investors have known that little ol’ Starbucks was going to be a life-changing investment if they held on to it? The answers are there in plain sight.
The good kind of growth
As previously mentioned, Starbucks went into 1992 with just 107 locations, but it quickly ramped up from there. By the end of fiscal 1997, it already had 1,381 stores. Sometimes restaurant management teams excuse bad comparable-store sales growth by saying they’re focused on unit growth, not comps. But Starbucks shows that the best investments offer both. The company began measuring comps in 1989, and it grew them every year through 2007.
Furthermore, Starbucks was profitable very early on. The company first became profitable in 1990, and earned $4.1 million in net income from revenue of $93 million in 1992, its first year as a public company. By 2011, it earned over $1 billion for the first time.
Looking at the company’s profitability was a good reason to buy Starbucks’ IPO. And growing comps as it rapidly expanded into new markets was another strong buy signal. It was an indication that Starbucks’ product resonated wherever it went, and there was an entire world waiting for it.
Untapped global opportunity
In 1996, Starbucks had grown to over 1,000 locations. But these were all in North America. Things changed in the fourth quarter of fiscal 1996, when it opened its first two locations in Tokyo. It was a sign of things to come. Today, Starbucks is approaching 14,000 international locations and still growing internationally at a 9.5% clip as of the second quarter of fiscal 2020.
Most of Starbucks’ international business is in China, accounting for 70% of company-operated international locations at the end of 2019. And it’s still the company’s fastest growing market. It added over 600 locations just last year for 17% growth.
There may be plenty more growth left in China, too. Consider that there are almost 9,000 company-operated locations in the U.S. compared with just over 4,000 in China. Since China is the world’s most populous nation and second strongest economy, it’s not outrageous to think Starbucks could double its store count in the country long term.
Coffee was a product the world was thirsty for. And it was a good reason to buy Starbucks’ IPO.
But it has not been without challenges
It hasn’t always been a smooth ride for Starbucks, and there have certainly been times it was tempting to sell. From May 2006 to November 2008, the stock lost over 75% of its value. Customer traffic and profitability had started to fall, and it led the company to close 800 U.S. locations in 2009.
But by focusing on cost controls, investing in digital, and improving its product, it wasn’t long before Starbucks recovered as a business and its stock reclaimed lost highs. Those who sold at the low point in 2008 have missed out on an 11-bagger since then.
It’s reminiscent of Starbucks’ stock drop of nearly 40% from February to March of this year as the COVID-19 pandemic ravaged its business in China. At one point, 80% of locations in China were closed, and then the virus spread to the rest of the world. Global comps fell 10% in the most recent quarter as a result. And it will likely get worse next quarter.
It was tempting for Starbucks shareholders to sell out. But if you were contrarian enough to see life in a post-pandemic world, and brave enough to keep holding, your Starbucks position has already recovered 36% from March lows.
Keeping the coffee flowing
These are some of the reasons one would have bought and held Starbucks stock all these years. And if you did? After six stock splits, you’d have just north of 37,000 shares worth $2.8 million. Not only that, those shares would be paying you over $60,000 in annual dividends — six times your initial investment in annual dividend income alone, earning you a fabled “divi-pop” (when a dividend pays more than your initial investment) with every quarterly payout.
While life-changing investments like this are rare, they do exist. I hope you can take lessons from Starbucks’ story to find tomorrow’s winners.