We expect coffee giant, Starbucks Corporation (SBUX - Analyst Report), to beat expectations when it reports fiscal first-quarter results on Jan 23. Last quarter, it posted in-line results. Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Starbucks is likely to beat earnings because it has the right combination of two key ingredients.
Positive Zacks ESP: Expected Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +2.90%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Starbucks carries a Zacks Rank #3 (Hold). Note that stocks with Zacks Ranks #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Starbucks’ Zacks Rank #3 and +2.90% ESP makes us confident about a positive earnings beat.
What is Driving the Better-Than-Expected Earnings?
In the first quarter, management expects to post earnings in the range of 67 cents to 69 cents. Decent revenues, positive comps and lower coffee costs are expected to benefit earnings which will be partially offset by the lower pricing for packaged coffee, higher taxes and interest expense. In addition to food/beverage innovations, loyalty program and single-serve products which drove growth in fiscal 2013, we believe that La Boulange bakery items, Evolution Fresh juices and Teavana tea could emerge as meaningful top-line growth drivers in fiscal 2014.
Starbucks has been seeing strong traffic trends in the U.S. due to innovation, enhanced food offerings and its successful loyalty program. We believe the comps will continue to grow in the U.S. driven by innovative beverages (including handcrafted carbonated beverages), enhanced food offerings, La Boulange's national expansion and introduction of Teavana tea into stores. Also, the company saw improving consumer traffic trends in its European stores in the fourth quarter of fiscal 2013. Moreover, revenues and profits in the Channel Development segment are expected to accelerate in fiscal 2014 despite a slower fiscal 2013.
Other Stocks to Consider
Other stocks in the retail restaurants sector that have both a positive earnings ESP and a favorable Zacks Rank are:
Jack in the Box Inc. (JACK - Snapshot Report), with Earnings ESP of +1.54% and a Zacks Rank #1 (Strong Buy).
Buffalo Wild Wings Inc. (BWLD - Analyst Report) with Earnings ESP of +0.94% and a Zacks Rank #2 (Buy).
Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report), with Earnings ESP of +1.86% and a Zacks Rank #2.