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Starbucks (SBUX) Stock Up on Q3 Earnings Top & Comps Rebound
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Starbucks Corporation (SBUX - Free Report) reported third-quarter fiscal 2020 results, with earnings and revenues surpassing the Zacks Consensus Estimate. While the bottom line surpassed the Zacks Consensus Estimate for the third straight quarter, the top line beat the same for the second straight quarter.
However, both the metrics declined sharply year over year due to the coronavirus pandemic. Following the results, the company’s shares increased 5.7% in after-hour trading session as investors’ sentiment was boosted by better-than-expected results and sequential improvement in comparable store sales. The company stated that of the 3,100 U.S. stores that remained opened throughout the third quarter, it witnessed comps decline of 14% and 1% in May and June, respectively. For July month-to-date, comps increased 2%. The company continues to benefit from robust drive-thru and deliver options. Mobile ordering in the third quarter increased 6 percentage points from a year ago to make up 22% of total transactions.
The company noted that due to the coronavirus pandemic the company had lost nearly $3.1 billion in consolidated revenues. The downside was primarily caused by store closures, limited sales channels, reduced operating hours and dismal customer traffic.
Discussion on Earnings, Revenues & Comps
In the quarter under review, the company reported adjusted loss per share of 46 cents per share, narrower than the Zacks Consensus Estimate of loss per share of 61 cents. In the prior-year quarter, the company had reported adjusted earnings per share of 78 cents.
Total revenues came in at $4,222.1 million, which beat the Zacks Consensus Estimate of $4,111 million. However, the top line fell 38.1% from the year-ago quarter’s level. The downtick was due to dismal global retail sales and comparable sales and decline in store traffic.
Global comparable store sales declined 40% compared with a decline of 10% in second-quarter fiscal 2020. Global comps declined due to 51% fall in comparable transactions, marginally offset by 23% increase in average ticket.
Starbucks opened 130 net new stores worldwide in the third quarter, bringing the total store count to 32,180. Global store growth came in at 5%, based on a year-over-year comparison.
Starbucks Corporation Price, Consensus and EPS Surprise
On a non-GAAP basis, operating margin came in at 12.6% compared with 18.3% reported in the prior-year quarter. The downtrend was primarily due to sales deleverage and rise in costs induced by the coronavirus pandemic.
Segmental Performance
In fourth-quarter fiscal 2019, the company realigned its operating segments. Specifically, the China/Asia Pacific segment and Europe, Middle East and Africa segment have been combined into one International segment.
Results of Siren Retail — which is a non-reportable operating segment consisting of Starbucks Reserve TM Roastery & Tasting Rooms, Starbucks Reserve brand and Princi operations — were previously included within Corporate and Other. It now reports within Americas and International segments based on the geographical location of operations.
Americas: Net revenues in this flagship segment came in at $2,805.5 million, down 40% year over year. Although the segment revenues in the quarter benefited from 382 net new store opening in a year’s time, it was offset by 41% comparable store sales decline primarily due to the coronavirus outbreak.
Due to the pandemic, America’s fiscal third-quarter revenues were impacted by nearly $2.3 billion. Moreover, the segment’s operating income was roughly impacted by $1.5 billion.
Adjusted operating margin in the Americas segment contracted to 14.4% compared with 21.8% in the prior-year quarter. The downtrend can primarily be attributed to sales deleverage and rise in costs due to the coronavirus pandemic, mostly catastrophe wages, and heightened pay programs and additional benefits in support of retail store partners and store safety items.
International: Net revenues declined 40% year over year to $949.6 million in the segment, thanks to decline of 37% in comparable store sales stemming from the pandemic and decline in product sales to the company’s licensees. Moreover, the decline was due to 2% revenue-dilutive effect of transforming Thailand to a fully-licensed market in fiscal 2019. However, the downside was partially offset by 1,172 net new store openings in a year’s time.
Moreover, adjusted operating margin in the segment fell to 9.1% from 17.1% in the year-ago quarter owing to sales deleverage. Moreover, royalty relief granted to international licensees as well as additional costs incurred, which includes catastrophe wages, marginally overshadowed by temporary government subsidies and rent concessions.
Comps in China declined 19%, including 27% transaction fall due to store closures and reduced traffic.
The company announced that 99% of its stores in China have commenced operations and anticipates continued improvement in traffic.
Channel Development: Net revenues in the segment declined 16% from the prior-year quarter’s figure to $447.3 million. The decline was primarily due to nearly 21% unfavorable impact of Global Coffee Alliance transition-related activities, which includes lapping higher inventory sales in the prior-year quarter as Nestlé prepared to fulfill customer orders. Moreover, operating margin contracted 630 basis points to 27.8%.
Guidance
The company provided fiscal 2020 guidance, wherein it anticipates the negative impact of the coronavirus pandemic to moderate in fourth-quarter fiscal 2020. The company expected global comparable sales to decline 12% and 17% in the fourth quarter and fiscal 2020, respectively. Moreover, the company anticipates Americas and U.S. comparable store sales decrease of 12% to 17% in the fourth quarter and 2020, respectively. Earlier, the company had anticipated comps decline of 10% to 20% for the fourth quarter and full year.
For the fourth quarter, international comps are expected to decline 10% to 15% compared with the prior estimate of 10% to 20%. For fiscal 2020, the company anticipates international comps to decline 20% to 25% compared with the prior estimate of decline of 20% to 30%.
In China, comps are expected to be flat to down 5% in fourth quarter compared with the prior estimate of flat comps. For fiscal 2020, comps are expected to be down 15% to 20% compared with prior estimate of decline of 10% to 20%.
Starbucks expects consolidated revenues decline of 10-15% for the fourth quarter. Non-GAAP earnings for the fourth quarter are anticipated to be 18-33 cents, whereas for full year it is expected in the range of 83-93 cents. The Zacks Consensus Estimate for the fourth quarter and fiscal 2020 are currently pegged at 27 cents and 80 cents, respectively.
Other Financial Updates
The company ended the quarter with cash and cash equivalents of $3,965.9 million compared with $2,686.6 million at the end of Sep 29, 2019. As of Jun 28, 2020, long-term debt is at $14,645.6 million compared with $11,167 million as of Sep 29, 2019.
Moreover, the company declared a cash dividend of 41 cents per share, payable on Aug 21, to shareholders of record as of Aug 7.
Zacks Rank & Key Picks
Starbucks, which shares space with McDonald's Corporation (MCD - Free Report) , has a Zacks Rank #4 (Sell).
Domino's Pizza and Yum China have an impressive long-term earnings growth rate of 13.9% and 9.5%, respectively.
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Starbucks (SBUX) Stock Up on Q3 Earnings Top & Comps Rebound
Starbucks Corporation (SBUX - Free Report) reported third-quarter fiscal 2020 results, with earnings and revenues surpassing the Zacks Consensus Estimate. While the bottom line surpassed the Zacks Consensus Estimate for the third straight quarter, the top line beat the same for the second straight quarter.
However, both the metrics declined sharply year over year due to the coronavirus pandemic. Following the results, the company’s shares increased 5.7% in after-hour trading session as investors’ sentiment was boosted by better-than-expected results and sequential improvement in comparable store sales. The company stated that of the 3,100 U.S. stores that remained opened throughout the third quarter, it witnessed comps decline of 14% and 1% in May and June, respectively. For July month-to-date, comps increased 2%. The company continues to benefit from robust drive-thru and deliver options. Mobile ordering in the third quarter increased 6 percentage points from a year ago to make up 22% of total transactions.
The company noted that due to the coronavirus pandemic the company had lost nearly $3.1 billion in consolidated revenues. The downside was primarily caused by store closures, limited sales channels, reduced operating hours and dismal customer traffic.
Discussion on Earnings, Revenues & Comps
In the quarter under review, the company reported adjusted loss per share of 46 cents per share, narrower than the Zacks Consensus Estimate of loss per share of 61 cents. In the prior-year quarter, the company had reported adjusted earnings per share of 78 cents.
Total revenues came in at $4,222.1 million, which beat the Zacks Consensus Estimate of $4,111 million. However, the top line fell 38.1% from the year-ago quarter’s level. The downtick was due to dismal global retail sales and comparable sales and decline in store traffic.
Global comparable store sales declined 40% compared with a decline of 10% in second-quarter fiscal 2020. Global comps declined due to 51% fall in comparable transactions, marginally offset by 23% increase in average ticket.
Starbucks opened 130 net new stores worldwide in the third quarter, bringing the total store count to 32,180. Global store growth came in at 5%, based on a year-over-year comparison.
Starbucks Corporation Price, Consensus and EPS Surprise
Starbucks Corporation price-consensus-eps-surprise-chart | Starbucks Corporation Quote
Overall Margin Contracts in Q3
On a non-GAAP basis, operating margin came in at 12.6% compared with 18.3% reported in the prior-year quarter. The downtrend was primarily due to sales deleverage and rise in costs induced by the coronavirus pandemic.
Segmental Performance
In fourth-quarter fiscal 2019, the company realigned its operating segments. Specifically, the China/Asia Pacific segment and Europe, Middle East and Africa segment have been combined into one International segment.
Results of Siren Retail — which is a non-reportable operating segment consisting of Starbucks Reserve TM Roastery & Tasting Rooms, Starbucks Reserve brand and Princi operations — were previously included within Corporate and Other. It now reports within Americas and International segments based on the geographical location of operations.
Americas: Net revenues in this flagship segment came in at $2,805.5 million, down 40% year over year. Although the segment revenues in the quarter benefited from 382 net new store opening in a year’s time, it was offset by 41% comparable store sales decline primarily due to the coronavirus outbreak.
Due to the pandemic, America’s fiscal third-quarter revenues were impacted by nearly $2.3 billion. Moreover, the segment’s operating income was roughly impacted by $1.5 billion.
Adjusted operating margin in the Americas segment contracted to 14.4% compared with 21.8% in the prior-year quarter. The downtrend can primarily be attributed to sales deleverage and rise in costs due to the coronavirus pandemic, mostly catastrophe wages, and heightened pay programs and additional benefits in support of retail store partners and store safety items.
International: Net revenues declined 40% year over year to $949.6 million in the segment, thanks to decline of 37% in comparable store sales stemming from the pandemic and decline in product sales to the company’s licensees. Moreover, the decline was due to 2% revenue-dilutive effect of transforming Thailand to a fully-licensed market in fiscal 2019. However, the downside was partially offset by 1,172 net new store openings in a year’s time.
Moreover, adjusted operating margin in the segment fell to 9.1% from 17.1% in the year-ago quarter owing to sales deleverage. Moreover, royalty relief granted to international licensees as well as additional costs incurred, which includes catastrophe wages, marginally overshadowed by temporary government subsidies and rent concessions.
Comps in China declined 19%, including 27% transaction fall due to store closures and reduced traffic.
The company announced that 99% of its stores in China have commenced operations and anticipates continued improvement in traffic.
Channel Development: Net revenues in the segment declined 16% from the prior-year quarter’s figure to $447.3 million. The decline was primarily due to nearly 21% unfavorable impact of Global Coffee Alliance transition-related activities, which includes lapping higher inventory sales in the prior-year quarter as Nestlé prepared to fulfill customer orders. Moreover, operating margin contracted 630 basis points to 27.8%.
Guidance
The company provided fiscal 2020 guidance, wherein it anticipates the negative impact of the coronavirus pandemic to moderate in fourth-quarter fiscal 2020. The company expected global comparable sales to decline 12% and 17% in the fourth quarter and fiscal 2020, respectively. Moreover, the company anticipates Americas and U.S. comparable store sales decrease of 12% to 17% in the fourth quarter and 2020, respectively. Earlier, the company had anticipated comps decline of 10% to 20% for the fourth quarter and full year.
For the fourth quarter, international comps are expected to decline 10% to 15% compared with the prior estimate of 10% to 20%. For fiscal 2020, the company anticipates international comps to decline 20% to 25% compared with the prior estimate of decline of 20% to 30%.
In China, comps are expected to be flat to down 5% in fourth quarter compared with the prior estimate of flat comps. For fiscal 2020, comps are expected to be down 15% to 20% compared with prior estimate of decline of 10% to 20%.
Starbucks expects consolidated revenues decline of 10-15% for the fourth quarter. Non-GAAP earnings for the fourth quarter are anticipated to be 18-33 cents, whereas for full year it is expected in the range of 83-93 cents. The Zacks Consensus Estimate for the fourth quarter and fiscal 2020 are currently pegged at 27 cents and 80 cents, respectively.
Other Financial Updates
The company ended the quarter with cash and cash equivalents of $3,965.9 million compared with $2,686.6 million at the end of Sep 29, 2019. As of Jun 28, 2020, long-term debt is at $14,645.6 million compared with $11,167 million as of Sep 29, 2019.
Moreover, the company declared a cash dividend of 41 cents per share, payable on Aug 21, to shareholders of record as of Aug 7.
Zacks Rank & Key Picks
Starbucks, which shares space with McDonald's Corporation (MCD - Free Report) , has a Zacks Rank #4 (Sell).
Some better-ranked stocks worth considering in the same space include Domino's Pizza, Inc. (DPZ - Free Report) and Yum China Holdings, Inc. (YUMC - Free Report) . Both the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Domino's Pizza and Yum China have an impressive long-term earnings growth rate of 13.9% and 9.5%, respectively.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2019, while the S&P 500 gained and impressive +53.6%, five of our strategies returned +65.8%, +97.1%, +118.0%, +175.7% and even +186.7%.
This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.
See their latest picks free >>