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Starbucks (SBUX) Q3 Earnings: Will Americas, CAP Aid Growth?

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Starbucks Corporation (SBUX - Free Report) is set to report third-quarter fiscal 2018 results on Jul 26, after the closing bell. In the last reported quarter, the company’s earnings came in line with the Zacks Consensus Estimate. Also, the coffee-chain giant’s bottom line matched estimates in three of the trailing four quarters, resulting in an average beat of 3.51%.

Q3 Expectations

The question lingering in investors’ minds now is whether Starbucks will be able to deliver a positive earnings surprise in the quarter to be reported. The Zacks Consensus Estimate for third-quarter earnings is pegged at 60 cents, higher than 55 cents in the year-ago quarter. In the past 30 days, the company’s earnings estimates have witnessed downward revisions of 7.7%. In second-quarter fiscal 2018, it witnessed earnings growth of 17.8% on a year-over-year basis.

Meanwhile, analysts polled by Zacks expect revenues of nearly $6,259 million, up 10.6% from the prior-year quarter.

Let’s delve deeper to find out how the company’s top and bottom line will shape up this earnings season.

Top-Line Growth to Continue

Starbucks, which has reported top-line growth in the first and second quarter of fiscal 2018, will continue with the momentum in the to-be-reported quarter as well. The metric is likely to be driven by new store additions, expansion in China, positive global comparable store sales or simply comps growth, and higher revenues from business segments.

Furthermore, the company is expected to experience comps growth in the fiscal third quarter. The Zacks Consensus Estimate for comps growth is pegged at 1.4%. Notably, beverage innovations have been a significant contributor to comps growth for Starbucks over the years. Seasonal offerings like pumpkin spice latte have been in the market for 10 years now and are quite popular. Additionally, the company is leaning toward fast-growing categories like Cold Brew, Draft Nitro beverages, and plant-based modifiers, including almond, coconut, and soy milk alternatives.

Also, robust performance by Starbucks’ segments such as the Americas, China-Asia-Pacific (CAP) and Europe, Middle East and Africa (EMEA) contributed to the company’s solid top-line performance. Per the Zacks Consensus Estimate, the Americas, CAP and EMEA segments are likely to witness year-over-year growth of 5.5%, 49.5% and 8.4%, respectively.

In order to boost its comps growth, Starbucks is strengthening its product portfolio with significant innovation in beverages, refreshment, health and wellness, tea and core food offerings. In fact, the company holds a leading position in digital, card, loyalty and mobile capabilities. Currently, Starbucks has secured a leading position to leverage its mobile and digital assets, and loyalty and e-Commerce platforms for capitalizing on these trends and create more revenue streams.

China: A Key Growth Driver

Starbucks brand is gaining popularity across Asia as it is increasingly investing in the Asian markets. The relatively low per-capita consumption and a burgeoning middle class with rising income levels leads to increasing demand for convenience food and beverages and promise significant growth potential.

In fact, management believes that China and the Asia-Pacific region will drive much more meaningful business growth over the next five years supported by rapid unit growth, growing brand awareness, and increased usage of the digital/mobile/loyalty platforms. Starbucks currently (as of Apr 1, 2018) operates 7,995 stores across CAP. Meanwhile, Starbucks' business in China is rapidly growing owing to innovative store designs, local product innovations and the success of MSR program. It has plans to launch certain features in China loyalty program this year and full-digital capabilities over time. The Seattle-based coffee giant has plans to build 600 net new stores annually, over the next five years in Mainland China. These, in turn, should double the market's store count to 6,000 across 230 cities from the figure at fiscal 2017 end.

Dwindling Margins: A Concern

The non-GAAP operating margin shriveled 170 bps and 80 bps during the fiscal second and first quarter, respectively. In the fourth quarter of fiscal 2017, non-GAAP operating margin also contracted 90 bps. The decrease was mainly due to a significant shift in product mix toward food and restructuring costs associated with the company's ongoing efforts to streamline business operations. Additionally, higher spending in its store partners (employees) along with the impact of its ownership change in East China added to the woes in the fiscal second quarter. Management expects a moderate decline in operating margin in fiscal 2018, reflecting additional partner and digital investments.

Starbucks Corporation Price, Consensus and EPS Surprise

What Does the Zacks Model Unveil?

Our proven model does not show that Starbucks is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Starbucks has an Earnings ESP of 0.00%. Although, the company’s Zacks Rank #3 increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.  You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks With Favorable Combination

Here are a few other stocks from the Restaurant space that investors may consider as our model shows that they have the right combination of elements to post an earnings beat in the quarter:

The Wendy's Company (WEN - Free Report) has an Earnings ESP of +1.59% and a Zacks Rank #2.

Brinker International, Inc. (EAT - Free Report) has an Earnings ESP of +1.29% and a Zacks Rank #3.

The Cheesecake Factory Incorporated (CAKE - Free Report) has an Earnings ESP of +1.27% and a Zacks Rank of 3.

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