On Sep 6, we issued an updated research report on the coffee chain giant Starbucks Corporation (SBUX - Free Report) .
Starbucks’ shares have lost 0.7% so far this year, comparing unfavorably with 6.5% growth of the industry. In fact, after hitting a 52-week high of $64.87 on Jun 5, the company’s shares have been trending a bit off, with the stock declining 14.2%. Investors have become more cautious lately despite the spotlight on growth prospects in China and revenue growth in the United States.
What is Making Starbucks Tumble?
It goes without saying that Starbucks has been experiencing tepid comps growth in the U.S. for quite some time now amid persistent decline in the country’s restaurant sales. However, the company showed signs of growth in its third-quarter fiscal 2017 results, wherein its global same-store sales (comps) increased 4% compared with 3% in the preceding quarter.
Even its flagship Americas segment witnessed 5% comps growth compared with 3% in the preceding quarter. Importantly, its U.S. comps grew 5%, comprising 5% increase in average ticket. The company’s top and bottom lines grew 8.1% and 12.2%, respectively, year over year in the quarter.
Despite Americas comps showing decent growth, softer trends in April and July due to broader industry dynamics, prompted Starbucks to have a more cautious view for the next quarter. Slower sales trend and higher investments in digital and Siren Retail (Roastery and Reserve locations) have led to lowered earnings projections for the fourth quarter as well as for the full year.
A Buy Opportunity?
Nevertheless, we are encouraged by Starbucks’s operating fundamentals as solid global retail footprint, successful innovations, best-in-class loyalty program and digital offerings remain strong. The company’s digital initiatives like mobile order/pay, delivery services and third-party loyalty partnerships can stimulate stronger sales trends in the Americas. These initiatives should further drive profit in the long term.
Importantly, the company remains focused on strong growth potential in China. In July, Starbucks announced plans of buying the remaining 50% stake in its East China business for $1.3 billion in cash, the company’s largest ever acquisition, as it continues to look at China as one of the main growth area. The addition will give Starbucks full ownership of about 1,300 Starbucks locations in Shanghai as well as Jiangsu and Zhejiang provinces.
With these growth drivers, we believe Starbucks' recent pullback is most probably a long-term opportunity for investors.
Meanwhile, Starbucks’ solid Growth Style Score of A substantiates our view. For the current fiscal year, sales growth is pegged at 5.6%, while EPS is likely to grow 7.9%. For the fiscal 2018, the company is expected to witness 9.2% sales growth and 14% EPS growth. Further, the stock has a solid long-term expected EPS growth rate of 17.6%.
Zacks Rank & Other Key Picks
Starbucks holds a Zacks Rank #3 (Hold). Investors can also consider stocks like Bob Evans Farms, Inc. , Bravo Brio Restaurant Group, Inc. and Papa John's International, Inc. (PZZA - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Full-year 2017 earnings for Bravo Brio are expected to increase 50%.
Bob Evans and Papa John’s delivered a positive earnings surprise in each of the trailing four quarters, the average beat being 11.91% and 5.10%, respectively.
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