Starbucks is a buy after shares fall on worries over China’s reopening policy
Shares of Starbucks (SBUX) tumbled nearly 6% Monday on concerns that China will prolong its zero- Covid policy after President Xi Xi Jinping tightened his grip on power — a potential hurdle for the coffee giant as it looks to expand into the world’s second-largest economy. But we see this is a short-term setback that actually presents a buying opportunity. To be sure, Starbucks is doing everything it can to expand margins in its U.S. stores by upgrading equipment and redesigning its store formats. However, a lot of the coffee retailer’s footprint growth is tied to China . Management is targeting 9,000 stores in the country by its fiscal year 2025 , up from about 6,000 today. Starbucks says it plans on opening a new store every nine hours over the next three year s. Why is the coffee chain so bullish on the region despite the uncertain macroenvironment? There are several tailwinds supporting investment in the region. Some of the big ones include: a growing middle class with expanding discretionary budgets, urbanization, and in general, more people drinking coffee every year . About 10 year s ago, the average China consumer drank less than 3 cups of coffee a year , according to Starbucks. That number grew to about 10 cups in 2019, 12 this year , and is expected to increase to about 15 cups in 2025. Only 15 cups per year may seem minuscule compared to the average U.S. consumer, but that’s a steady increase for a massive population that doesn’t have a lot of other places to go to drink coffee . Coffee is a highly underpenetrated market in China . It’s also becoming more and more popular with younger people. Starbucks said at its recent investor day that ” coffee is emerging as the choice of beverage for the younger consumers in China .” Another key reason behind Starbucks’ aggressive China expansion plans is the expected return on investment in its stores. The company believes the payback period — the time it takes to recoup the cost of an investment — is less than two year s on its new stores. In other words, Starbucks will very quickly make back the money it is putting in. Although we cannot predict how the market will react to the day-to-day headlines out of China , short-term concerns about Covid policy takes nothing away from the company’s long-term ambitions in China . We would be buyers on the SBUX weakness today if we were not restricted from trading, and we hope to be able to buy below our average cost basis when our trading restrictions allow. (Jim Cramer’s Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
