Starbucks In 'Early Innings' Of Digital Transformation That Could Improve Profitability, Says Morgan Stanley

Starbucks Corporation SBUX is in the early stages of a digital transformation that would aid top and bottom line growth, according to Morgan Stanley.

Starbucks is making digital adoption one of the key priorities in 2016, and is encouraged by the rapid initial adoption of mobile order and pay (about 3 percent of transactions in the last quarter but ascending rapidly).

The brokerage added that fiscal 2016 should see more innovation in that area including suggestive upsell features (drives check) as well likely future expansion of delivery, which seamlessly integrates into the existing app and runs with courier partner Postmates.

Great Northwest

Morgan Stanley also met with management teams of other Seattle-based consumer companies: including Amazon.com, Inc. AMZN, Costco Wholesale Corporation COST and Nordstrom, Inc. JWN.

Morgan Stanley said Amazon called out Prime as a key driver behind recent strong (and accelerating) retail top-line trends, as global paid Prime subscribers are still growing over 50 percent year-over-year. Amazon is focused on improving process efficiency and the brokerage sees Amazon's aging fulfillment center footprint as a growing tailwind to retail profitability.

On Costco, Morgan Stanley said: "From a near-term perspective, our sense is that the "choppiness" seen in Q1 may persist for another quarter or two. But the underlying health and loyalty of COST consumer and the profitability of the model remain intact. Membership trends are healthy and COST is not seeing signs of higher end spending slowing."

The brokerage said there are meaningful catalysts to look forward to such as the Visa transition (early June) and a membership price increase, which is likely in early calendar 2017.

On Nordstrom, Morgan Stanley said the margin pressure unlikely to abate and noted: "We expect Nordstrom.com to grow at a low-double digit rate (vs. historical 20+%) and Rack's declining new store productivity (4Q15 —60% vs. 4Q14 —67%) likely reduces its future sales contribution. Still, these channels present viable, even if slower, revenue growth opportunities, in addition to solid top-line momentum from HauteLook, Nordstromrack.com and TrunkClub.

Morgan Stanley has an Overweight rating on Starbucks, Costco and Amazon. It rates Nordstrom Underweight.