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Analyst Blog

On Oct 19, we issued an updated research report on Starbucks Corporation (SBUX - Analyst Report) , the leading roaster and retailer of specialty coffee in the world. Also, Starbucks offers many complementary food items and a selection of premium teas and other beverages through its retail stores.

Starbucks has been strengthening its portfolio with innovation in beverages and core food offerings. The company’s operating fundamentals are strong – solid global retail footprint, successful innovation, best-in-class loyalty program and digital offerings. Again, digital initiatives like mobile order/pay, delivery services and third-party loyalty partnerships can stimulate stronger sales in the Americas.

In spite of several initiatives, third-quarter sales were down chiefly due to a slowdown in comps and traffic trends in the flagship U.S. market. Revenues of $5.24 billion missed the Zacks Consensus Estimate by 2.1%. However, the headwinds are temporary and Starbucks expects U.S. comps to improve in the next quarter.

Focus on Innovation

Beverage innovation has been a significant contributor to comps for Starbucks over the years. Starbucks Refreshers, its energy drink, has been an instant hit. Seasonal offerings like pumpkin spice latte have been in the market for 10 years now and are quite popular.

Recently, the company introduced Teavana beverages and teas across 16 markets in China and the Asia-Pacific region along with Hippeas – organic gluten-free chickpea puffs – in the U.S.

Other successful beverage innovations include Flat White, Cold Brew, Fizzio sodas, Teavana Oprah Chai and Green Tea Red Bean Frappuccino in Asia Pacific.

Macroeconomic Headwinds

In Europe, economic/political conditions are anticipated to be challenging after U.K.’s exit from the 28-member economic bloc. As it is, business in Europe has been affected by economic uncertainties in the Northern region and deflation in the Eurozone.

High inflation rates and currency devaluation are hurting sales in Latin America, especially Brazil and Argentina. Moreover, though dollar has weakened slightly in 2016 compared to the previous year, the negative currency impact is still considerably high for Starbucks as it generates a decent amount of sales from international markets.

Starbucks currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the industry include Potbelly Corporation (PBPB - Snapshot Report) , Wingstop Inc. (WING - Snapshot Report) and Brinker International, Inc. (EAT - Analyst Report) .

Potbelly’s fiscal 2016 earnings are expected to increase 25.9%. The company sports a Zacks Rank #1 (Strong Buy).

Wingstop Inc. is expected to witness 18.09% increase in earnings and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Brinker International’s fiscal 2017 earnings are expected to decline 3.04%. It carries a Zacks Rank #2 (Buy).

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