It has been about a month since the last earnings report for Starbucks Corporation (SBUX - Free Report) . Shares have added about 3.3% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Starbucks Q2 Earnings in Line, Guidance Lacks Froth
Earnings, Sales & Comps Discussion
Adjusted earnings per share (EPS) of $0.45 was in line with the Zacks Consensus Estimate, but grew 15% year over year.
Total second-quarter sales of $5.29 billion increased 6% year over year, driven by higher store openings (2,240 net new stores opened over the past 12 months) and global comps growth. Revenues, however, missed the Zacks Consensus Estimate of $5.42 billion by 2.4%. Robust sales in the U.S., China/Asia Pacific as well as Channel Development segments made up for the slowdown in the Europe, Middle East, and Africa (EMEA) division.
Global same-store sales (comps) grew a meager 3%, same as the previous-quarter growth. Global traffic decreased 1% in the quarter, same as the previous quarter. Average ticket growth was 4%, in line with the previous quarter. The company seems to have failed to lift its mojo this quarter.
Operating margin increased 40 basis points (bps) year over year to 17.7% in the quarter, as improved sales leverage offset higher employee investments, primarily in the Americas segment.
Americas: Net revenue in this flagship segment rose 8% year over year to $3.72 billion.
Comps rise of 3% in the quarter was softer than 5% last quarter. U.S. comps grew 3%, comprising 4% increase in average ticket and a 2% decrease in transactions.
Food sales contributed 2% to comps growth in the quarter. Morning bakery and Breakfast sandwiches continued to do well. The company’s recently introduced Sous Vide egg bites also showed healthy response.
On the beverage platforms, Starbucks’ iced-beverage performance was solid in the quarter. Again, the company witnessed solid double-digit growth across each of its espresso, coffee, Teavana tea, and Starbucks refreshers.
Membership was up 11% year over year in the My Starbucks Rewards (MSR) program in the quarter. Customers in the U.S. are using the chain’s mobile app to order and pay for their drinks and are joining the company’s rewards program. Mobile payments represented 29% of U.S. transactions, up from 24% a year ago.
Operating margin in the segment, however, contracted 130 bps to 22.2% as strong sales leverage were more than offset by higher investments.
China-Asia-Pacific (CAP): Net revenue rose 13% to $768.9 million on the back of higher revenues from new store opening and comp store sales growth.
Comps grew 3%, higher than 1% growth seen in the previous quarter backed by strength in China. Japan also posted solid results in the quarter.
China comps rose 7%, banking on 6% growth in transactions. Starbucks’ licensed joint venture markets including East China and South Korea continue to positively contribute to CAP's performance in the quarter as evidenced by a 35% increase in income from joint ventures.
Operating margin at the CAP segment rose 370 bps year over year to 24.7% buoyed by strong sales leverage and higher JV income.
Europe, Middle East and Africa (EMEA): Net revenue declined 14% year over year to $231.7 million due to portfolio shift to licensed stores including the sale of the Germany outlet.
Comps declined 1%, same as the last quarter, owing to economic and geopolitical uncertainty.
Operating margin, however, expanded 170 bps to 12% owing to a shift in the portfolio toward more licensed stores.
Channel Development: This segment includes roasted whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages (like Frappuccino and Starbucks Refreshers) and Starbucks and Tazo branded K-Cup packs sold through channels such as grocery, specialty retailers, and foodservice, to name a few.
Channel Development’s net revenues were at par with the year-ago level at $461.3 million.
Operating margin rose 250 bps to 42% driven by higher profits from the North American Coffee Partnership (NCAP) with PepsiCo, Inc, (PEP) and lower coffee costs.
All-Other: The segment comprises emerging brands like Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution Fresh and Digital Ventures. Revenues at the segment decreased 14% to $111.7 million.
Fiscal 2017 Guidance
The company reaffirmed its plans of opening 12,000 new stores globally and 3,400 net new stores in the U.S. by fiscal 2021.
For fiscal 2017, the company cut its non-GAAP earnings target in the range of $2.08–$2.12 from $2.12–$2.14 per share expected earlier.
The company expects stronger revenue growth in the second half of the fiscal year, driven by mid-single digit comps including accelerating comps in the U.S.
The company expects its revenue to grow 8% to 10%, excluding approximately two points for the extra week in 2016 and one point for Fx. However, Starbucks anticipates the revenue growth to be at the lower end of the guided range given the first half of fiscal 2017 performance.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to three lower. While looking back an additional 30 days, we can see even more upward momentum. There have been six upward revisions in the last two months.
At this time, Starbucks' stock has an average Growth Score of 'C', though it is lagging a lot on the momentum front with an 'F'. The stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for growth investors based on our style scores.
Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.