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Starbucks Kept at Neutral

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On Jun 17, we maintained a Neutral recommendation on Starbucks Corporation (SBUX - Free Report) , following its mixed fiscal-second quarter 2013 results.

Why the Neutral Recommendation?

The coffee giant’s fiscal-second quarter 2013 earnings of 47 cents per share were in line with the Zacks Consensus Estimate. Earnings grew 20% year over year driven by solid margin growth. Revenues increased 11% as steady sales growth in the U.S. and Asia were partially offset by weakness in Europe. However, Starbucks failed to meet the Zacks revenue expectations despite the strong U.S. comps.

Moreover, though the company increased its earnings expectations for fiscal 2013, it did not change its sales outlook — signaling a lack of real growth. For fiscal 2013, the company continues to expect revenues to grow in the range of 10%–13% driven by mid single-digit comparable store sales growth and net new store openings. Earnings expectations were increased from a range of $2.06 — $2.15 to $2.12 — $2.18. However, the earnings guidance includes the second-quarter one-time gain from sale of a minority equity stake in a joint venture in Mexico.

Overall, we are encouraged by Starbucks’ strong market standing, new product launches, rapid growth in international markets, the flourishing Channel Development business and solid turnaround in the U.S. We believe that the company has compelling growth drivers like La Boulange, Verismo, Teavana, K-Cups, loyalty program and food innovations to sustain the earnings momentum, going forward.

However, poor sales in Europe due to the depressed macroeconomic conditions keep us on the sidelines. In the U.S., though some signs of modest economic recovery and improving consumer confidence can be seen, there is still great uncertainty.

Other Stocks to Consider

Starbucks carries a Zacks Rank #3 (Hold). CEC Entertainment Inc. , carrying a Zacks Rank #1 (Strong Buy) and Bloomin' Brands, Inc. (BLMN - Free Report) and Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) , both carrying a Zacks Rank #2 (Buy), are other stocks worth considering in this space.

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