When a company begins to coast and live off of its past accomplishments, it's often the beginning of a long, slow decline. While a hungry upstart works tirelessly to gain an edge, a successful, once-innovative company can gradually become complacent. Once-prominent names such as Blockbuster Video and Sears, Roebuck & Co. are just two examples of this phenomenon.
Earlier this week, we learned that Starbucks (SBUX) is anything but complacent. The Seattle-based coffee retailer unveiled an ambitious plan to reinvent itself, and projected annual earnings growth of 15% to 20% per year for the next three years.
The company announced plans to build 2,000 new U.S. locations over the next three years, and said new technologies and efficiencies would lead to same-store sales growth of 4% to 5%. News of the ambitious plan led to a breakout for the stock, as Starbucks closed at a six-month high.
Starbucks is the largest retail coffee chain in the U.S., with over 15,000 locations, so it's only fitting that Wednesday's breakout took the form of a cup and handle pattern (curved black lines). Starbucks blasted out of the bullish formation on nearly quadruple its average daily volume (arrow).
Chart by TradeStation
The pattern suggests that the stock could grind its way to a fresh year-to-date high. Starbucks has major resistance in the $117 area, left over from November and December of last year (black dotted line).
Wednesday's breakout is remarkable, because it occurred just one day after the major indexes suffered their worst session in over two years. Despite this, the stock broke above its 200-day moving average (red), closing well above that key indicator for the first time since early January.
Tuesday's bloodbath, which saw the S&P lose 4.3% and the Nasdaq Composite tumble 5.2%, was the worst individual session since June 11, 2020. The selling was inspired by Tuesday's consumer price index report, which showed prices rising by 8.3% compared to last year.
Starbucks' success comes down to one key component -- brand loyalty. Coffee is available everywhere, and almost every coffee vendor sells it for less than Starbucks.
But when it comes to Starbucks, price is not the issue. The people who want this product are willing to pay up, and would probably pay more if asked. Combine that loyalty with a plan to make the company even more innovative and efficient, and you have a great recipe for success.
