It has been about a month since the last earnings report for Starbucks (SBUX). Shares have added about 4.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Starbucks due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Starbucks Q3 Earnings Beat Estimate
Starbucks reported third-quarter fiscal 2019 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. With this, the bottom line outpaced the consensus mark for the fifth straight quarter, while the top line beat the same in five of the preceding six quarters. Further, management issued a bullish outlook for the fiscal year.
Quarterly results benefited from a robust performance by the Americas and China-Asia-Pacific segments, store openings, enhanced customer experience and digitalization. Furthermore, the company witnessed strong demand for its new beverages in the United States and China. Meanwhile, comparable sales from China increased for the fourth straight quarter.
Discussion on Earnings, Revenues & Comps
In the quarter under review, adjusted earnings of 78 cents per share surpassed the Zacks Consensus Estimate of 72 cents and also increased 26% on a year-over-year basis.
Total revenues came in at $6,823 million, which outpaced the consensus estimate of $6,685 million and also increased 8% from the year-ago level. The upside was driven by robust global retail sales, comparable sales growth, consolidation of the company’s East China business and streamline-driven activities.
Global comparable store sales increased 6% compared with 3% improvement in the second quarter of fiscal 2019. Global comps were driven by a 3% increase in average ticket and comparable transactions, respectively.
Starbucks opened 442 net new stores worldwide in the third quarter, bringing the total store count to 30,626. Global store growth came in at 7%, based on a year-over-year comparison. The company stated that approximately one-third of net new store openings were in China and 48% in other international markets.
Overall Margin Contraction Continues
On a non-GAAP basis, operating margin contracted 20 basis points (bps) year over year to 18.3%. The downturn was largely due to the company’s licensing of the Channel Development business.
Streamline activities also had an unfavorable impact of 70 bps on consolidated margins. Excluding the negative impacts, the non-GAAP operating margin expanded by approximately 50 bps owing to the company’s cost-saving initiatives, sales leverage and new revenue recognition accounting, partially offset by partnership investments, technological enhancement and rise in costs of goods sold attributable to product mix as well as inventory reserves.
Americas: Net revenues at this flagship segment increased 11% year over year to $ $4,671.8 million driven by 641 store openings in a year’s time and comps growth of 7% in the quarter under review.
Markedly, segmental growth was driven by robust performance of beverage — the company’s highest margin category. Growth was also favored by an improved in-store experience and digital initiatives. Beverage innovation and particularly Starbucks’ cold beverage platform, which includes refreshment, iced coffee and iced espresso, contributed to comps growth in the third quarter. Beverage and food contributed six points and one point of comps growth, respectively, during the same period.
Also, operating margin in the Americas segment expanded 130 bps to 23.2% owing to sales leverage, cost-saving initiatives and new revenue recognition accounting, partially offset by wage growth and inventory reserves.
China-Asia-Pacific (CAP): At this segment, net revenues increased 9% to $1,336.9 million. This upside can be attributed to 994 store openings over the past 12 months and a 5% improvement in comparable-store sales.
The company’s performance in China and Japan was remarkable in the quarter. In China, store count increased 16% year over year. China recorded comps growth of 6% in the quarter driven by a 2% rise in comp transactions. Notably, results in China benefited from the launch of Modern Mixology — a new beverage platform, the Starbucks Rewards loyalty program and delivery.
In Japan, Starbucks reported comps growth of 5% and comp transaction increased 1%. Results were driven by successful LTO performance in blended and espresso beverages as well as continued growth of the Starbucks Rewards program in Japan.
Meanwhile, CAP’s operating margin increased 10 bps year over year to 25.3% in the quarter under review owing to sales leverage and cost savings.
Europe, Middle East and Africa (EMEA): Net revenues dropped 11% year over year to $231.7 million at this segment. This downside can be attributed to the conversion of the company’s France as well as the Netherlands’ retail businesses to fully-licensed operations and the shutdown of company-operated stores.
That said, comps at EMEA increased 3% year over year. The metric remained flat in the preceding quarter. However, operating margin contracted 400 bps to 7.2% due to a surge in restructuring costs, overshadowed by a shift toward more licensed stores.
Channel Development: Net revenues at this segment decreased 6% to $533.3 million. The downturn was due to licensing of the company’s CPG as well as foodservice businesses to Nestlé, following completion of the deal on Aug 26, 2018. Moreover, operating margin contracted 690 bps to 34.1%.
Fiscal 2019 Guidance
Starbucks updated its fiscal 2019 guidance. The company now anticipates global comps growth of nearly 4% compared with 3-4% improvement projected earlier. Globally, it still expects to add approximately 2,000 net new stores, down from 2,100 stores guided previously. Consolidated GAAP revenue growth is projected to be 7% compared with the previous guidance of 5-7%.
GAAP EPS is envisioned to be $2.86-$2.88, up from $2.40-$2.44 projected earlier. Also, non-GAAP EPS is expected to be $2.80-$2.82, up from $2.75-$2.79 guided previously. The Zacks Consensus Estimate for fiscal 2019 earnings is currently pegged at $2.78, lower than the company’s projected range.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
At this time, Starbucks has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision has been net zero. Notably, Starbucks has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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