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ETFs in Focus as Starbucks Dishes out Lukewarm Results

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Starbucks Corporation SBUX, a leading coffee chain, reported weak sales growth during the non-holiday season. But, the company’s mixed fiscal third-quarter results and weak outlook disheartened investors, leading to a decline in its shares.

Starbucks’ share price fell 3% during after-hours market trading. The company has already lost 4% so far this year.

Earnings in Focus  

Starbucks’ adjusted earnings of 49 cents per share were in line with the Zacks Consensus Estimate. Earnings increased 17% year over year following strong growth in revenues. Fiscal third-quarter sales jumped 7% year over year to $5.24 billion on the back of robust global comparable store sales (comps) and a healthy increase in the opening of net new stores.

However, revenues came in lower than the Zacks Consensus Estimate of $5.35 billion. The company blamed the political and social turmoil globally for disappointing sales in Europe and the U.S., which led to a revenue miss for the quarter (read: Volatility ETFs: Buy or Sell Now?).

Meanwhile, the company also lowered its guidance for fiscal 2016. Starbucks now expects revenues to grow 10% as compared to the previously guided more than 10% in fiscal 2016, excluding the extra 53rd week, which is expected to add approximately 2%.

Comps are now expected to grow in mid-single digits as compared to the somewhat above mid-single-digit range expected earlier. Though operating margin in China/Asia-Pacific is expected to increase slightly over the prior year, operating margins in Americas and EMEA are expected to slightly increase and remain flat year over year, respectively.

For fiscal 2016, the company guided earnings per share of $1.88 to $1.89, as compared to the current Zacks Consensus Estimate of $1.89.

Weak guidance from the company for the current fiscal year dampened investor sentiment. However, factors including cheap fuel, better job prospects and increasing consumer confidence are likely to play an important role in boosting the restaurant industry, to which Starbucks belongs (read: ETFs to Buy After Strong Jobs Report).

In this scenario, we have highlighted two consumer discretionary ETFs with a solid Zacks ETF Rank and a good exposure to Starbucks that are expected to remain on investors’ radar following the earnings release.

Consumer Discretionary Select Sector SPDR ETF XLY

This consumer discretionary ETF follows the Consumer Discretionary Select Sector Index, holding 87 stocks. Starbucks occupies the sixth position in the fund with 3.6% allocation. Amazon.com (AMZN - Free Report) and Home Depot Inc. HD are the top two holdings in the fund. The product has garnered a robust $10.2 billion in assets and trades in a strong volume of 6.9 million shares. It is one of the cheapest ETFs in its category with only 14 bps in annual fees. It holds a Zacks ETF Rank #2 or ‘Buy’ rating with a Medium risk outlook (see: all Consumer Discretionary ETF here).

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This product provides exposure to a large basket of 386 stocks by tracking the MSCI USA IMI Consumer Discretionary Index. Starbucks is inthe sixth position holding a share of 2.8%. Amazon and Home Depot are the top two holdings in the fund. The product manages nearly $261.4 million in its asset base and trades in a moderate volume of 108,000 shares per day. It charges a negligible 8 bps in fees. FDIS carries a Zacks ETF Rank #1 or ‘Strong Buy’ rating with a Medium risk outlook (read: Fidelity Slashes Fees for 11 Sector ETFs).

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