Restaurants

Here's why Starbucks is Nomura-Instinet's top restaurant pick

Customers sit inside a Starbucks Corp. coffee shop in New York, U.S., on Monday, Jan. 18, 2016.
Victor J. Blue | Bloomberg | Getty Images

Starbucks shares ended 2016 down more than 7.5 percent, but at least one analyst expects that to turn around this year — going so far as to name the stock his top restaurant pick for 2017.

Nomura-Instinet analyst Mark Kalinowski sees Starbucks stock rising 16 percent over the next 12 months, if it holds its current multiple, and possibly more. He points to easier year-over-year comparisons flattering its same-store sales growth and store expansions as reasons that the stock will soar this year.

Investors have been concerned with the company's decelerated same-store sales in the back-half of 2016 and Howard Schultz's sudden departure as CEO of the company.

"Over the next 6 to12 months, particularly as Starbucks begins to lap less difficult year-over-year same-store sales comparisons, we believe that investors' nervousness about these two factors will lessen," he added.

Kalinowski anticipates that same-store sales will jump 5 percent worldwide this year, with double-digit revenue expansion and EPS growth of 12 percent.

"Most of our restaurant stock coverage list is dominated by concepts that are food-focused in nature (with many of them selling some beverages)," Kalinowski wrote in a research note Tuesday. "In contrast, Starbucks is beverage-focused (while selling some food). This key differentiating factor is one reason why Starbucks tends to face less direct competition than most other concepts in the highly competitive foodservice industry."

Kalinowski points to Starbucks' culture of innovation and introduction of mobile ordering and pay as reasons for its rampant success. In particular, the adoption of cold brew coffee, which accounted for 35 percent of in-store beverage sales in 2013 and will account for more than 50 percent by 2021, according to Kalinowski.

"Starbucks' heritage of innovation is largely unmatched in the restaurant industry," Kalinowski wrote. "If we had to name two (and only two) Great Disruptors for the restaurant industry, we would cite Starbucks and privately held Chick-fil-A."

In addition, Kalinowski said that because tea and coffee are "near universal in their appeal, Starbucks will not only achieve its goal of having 37,000 units open by the end of 2021, but could hit an even greater milestone in the following years.

"Well beyond 2021, we would not be surprised to see Starbucks exceed the 50,000-store level," he wrote.

Kalinowski's 50,000 store-front assertion is hardly a surprise considering Starbucks has been developing several new coffee concepts in recent years, including Reserve Roasteries and stores with Princi bakeries.

The company plans to open some 12,000 stores globally by 2021, up from about 25,000 as of the end of fiscal 2016. At that rate, Starbucks' unit growth rate would be about 8.1 percent per year.

"It is rare for retail companies of Starbucks's size (market cap of over $83 billion as of this writing) to offer this kind of unit growth potential," Kalinowski wrote. "We believe that investors will continue to pay a premium multiple to enjoy this type of unit growth potential in their portfolio."

The company's flagship Reserve Roastery and Tasting Room opened in its home market of Seattle in 2014. These "megastores" are designed to be much larger than a traditional Starbucks cafe and allow the company to do small-batch roastings of "rare and exotic" Reserve coffees.

The company could open as many as 20 to 30 of these locations around the world. Currently, Starbucks is slated to open locations in New York, Shanghai, Tokyo and another location in Europe in the next three years.

In addition, the coffee chain, which partnered with Italian baker Rocco Princi in July, disclosed during its investor day in December that it will open stand-alone Princi stores in Seattle, New York and Chicago in late 2017 and early 2018.

"Looking toward the future, we believe that Starbucks can grow its nascent Starbucks Reserve business from a tiny revenue generator today into a $3 billion revenue business over time (1,000 Starbucks Reserve stores achieving $3 million in average unit volumes, or roughly twice what the average U.S. Starbucks store attained in fiscal 2016)," Kalinowski wrote.