Wide-moat Starbucks (SBUX) posted surprisingly resilient fiscal fourth-quarter results, with positive U.S. traffic and a 16% surge in loyalty program membership despite a 10% annual price increase attesting to the strength of its brand. Sales of $8.4 billion healthily outstripped our $8.1 billion forecasts for the quarter, and fiscal 2023 guidance for 10%-12% sales and 15%-20% EPS growth represent a strong vote of confidence in underlying business momentum.
While such figures strike us as plausible given the initiatives unveiled at the firm’s September 2022 investor day, we remain less constructive regarding the firm’s 7%-9% domestic comparable store sales targets in the following years, with incremental growth from cold beverages, drink modifiers, and new drink launches looking unlikely to achieve those benchmarks absent meaningful price increases. In our view, the degree of pricing power restaurants have enjoyed in 2021 and 2022 may not be repeatable in an era of rising borrowing costs, inflationary pressure, and declining asset valuations. We anticipate few changes to our long-term forecasts considering fiscal fourth-quarter results and expect to raise our $104 fair value estimate by a low-single-digit percentage due to time value.
Investments in partner wages in the quarter weighed heavily on restaurant margins, which, by our estimates, fell to 15.6% in North America (a 390-basis-point sequential decline). We expect such pressure to persist until wage increases are rolled over in the fourth quarter of next year, with a recovery to high-teens restaurant margins unlikely to be reached until fiscal 2024. Finally, with some of the best unit economics in the industry, we continue to view high-single-digit (7%) annual unit growth over the next five years as plausible, particularly with the Chinese market (9% of sales) growing at a low-teens annual clip.
