The restaurant industry is extremely competitive, but what helps Starbucks stand out is its strong brand. The strength of the Starbucks brand is clearly demonstrated by how it is known globally. Of its 38,951 stores, 57% are located outside of the US. It is also important to understand that the key to Starbucks' success has been its proven pricing power.
Coffee products are essentially commodity goods, which makes it difficult to differentiate. But by building its brand with premium status, Starbucks has been able to charge high prices and achieve an average gross margin of 28.1% over the past 10 years.
The business is consistently profitable and this important characteristic is something that long-term investors should look for in businesses they own because it reduces financial risk. Starbucks has paid a steadily increasing dividend since 2010.
The share price is about 40% below its peak. There is no doubt that the market has become increasingly pessimistic about the business.
But it presents a buying opportunity. The stock is trading at a (forward P/E) price-to-earnings ratio of 21.1, the cheapest valuation in several years. And that's based on earnings forecasts for fiscal 2024 that have been lowered by management. On a more normalized basis, the valuation would look even more attractive.
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