Can Starbucks Corporation Stock Outperform from China Expansion this Year?

Starbucks Corporation (NASDAQ:SBUX) is bullish on the world’s most populous country and aims to open 500 new coffee stores in China each year for another five years. The leading coffee chain has 2,000 stores across China where coffee culture has recently exploded. Chief Executive of Starbucks, Howard Schultz is taking advantage of this trend and shrugs off slower economic growth issues that have prevailed in this country over the past year.

The Chinese economy currently suffers from economic turmoil that has resulted in lower sales for global restaurants. Yum Brands, Inc. (NYSE: YUM), owner of Pizza Hut and KFC restaurants, has separated its Chinese subsidiary after it suffered weak sales in the past year. Starbucks has sustained a trend of high sales growth in this region despite devaluation of the Chinese currency.

The company’s same-store-sales (SSS) growth in China and Asia Pacific has increased in high single digits for the last seven quarters. SSS from China rose by 6% in 4QFY15 whereas revenues from this segment more than doubled from a year earlier, to $652.2 million in the same period. On the back of high sales growth, the coffee maker has schemed to open 3,400 stores in its largest foreign market until 2019. It aims to create 10,000 jobs each year as it expands its network through this period.

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Per capita income for the Chinese middle class is expected to surge over the next 15 years. This reflects a good opportunity for consumer businesses such as coffee chains. Starbucks has entered into ecommerce partnership with China based-Alibaba Group Holding Ltd. (NYSE: BABA) to expand into the fastest growing consumer market and bolster sales through online orders. The launch of Starbucks on Alibaba’s TMall platform can provide penetration in those cities where the coffee chain is less diffused.

There is a huge probability that the company may introduce mobile order/ pay and delivery services for Chinese customers in 2016 similar to the services offered in North America. Mobile payment services became available in United States on September 22, 2015 for Starbucks customers that have led to higher fourth quarter sales from this segment.

The company has enjoyed solid performance in the last fiscal and expects global SSS growth in mid-single digits in 2016. Global SSS growth came in at 7% driven by increase in customer traffic and growth across all geographic segments. Overall revenues increased by 17% year over year (YoY) to $19.2 billion in 2015 whereas operating income jumped by 17% to $3.6 billion from prior year. Earnings per share (EPS) came in at $1.82 in 2015 up from $1.37 in 2014. Analysts now expect EPS to grow by 3% to $1.89 in 2016.

On account of solid performance, shares of the Starbucks have surged by 46.7% in 2015 as compared to S&P 500 Index that was down by 2.14% in the same year. On the back of strong sales and expansion in fast growing consumer markets such as China, investors have high expectations from this company which is reflected in 12-month target price of $68.26 that is 18% higher than its current price of $57.82.