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Starbucks (SBUX) Down 2.9% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Starbucks Corporation (SBUX - Free Report) . Shares have lost about 2.9% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is SBUX due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Second-Quarter Fiscal 2018 Results

Starbucks reported in-line earnings but exceeded the Zacks Consensus Estimate for revenues in the second-quarter of fiscal 2018. The company’s results benefited from an improved performance in the Americas segment (mainly in the United States), the ongoing momentum in China (following the takeover of East China) and strongest comps growth in Japan in the last five quarters.

Earnings, Sales & Comps Discussion

Adjusted earnings per share (EPS) of 53 cents met the consensus mark but grew 17.8% year over year.

Total sales of $6.03 billion surpassed the consensus estimate of $5.9 billion by 2.3% and increased 13.9% from the year-ago level. Notably, the acquisition of the East China business as well as other portfolio reshuffling activities lent a 3% net benefit to its top line. These activities include the closure of the Teavana mall store in the quarter, Tazo divestiture in December and conversion of certain international retail operations from company-owned to licensed models. Meanwhile, currency translation had a 2% positive impact on the revenues.

The year-over-year performance was also driven by higher revenues from the opening of 2,103 net new stores over the past 12 months and higher global comps growth.

Global same-store sales increased 2%, same as first-quarter fiscal 2018. Global traffic increased 3%, better than 2% increase witnessed in the first quarter. Transactions were down 1% versus no growth recorded in the preceding quarter. The company opened 468 net new stores globally, bringing the total store count to 28,209 across 76 markets. It also closed 298 Teavana stores in the quarter.

Margin Down

Operating margin decreased 490 bps year over year to 12.8% in the quarter, due to a product mix shift largely toward food and restructuring costs associated with the company's ongoing efforts of streamlining business operations. Again, higher spending in its store partners (employees) along with the impact of its ownership change in East China added to the woes.
On a non-GAAP basis, operating margin declined 170 bps to 16.2%.

Quarterly Segment Details

Americas: Net revenues in this flagship segment were up 8% year over year to $4 billion.

Comps growth of 2% in the quarter (same as the first quarter of fiscal 2018) comprised a 3% increase in average ticket. U.S. comps also grew 2% albeit less than the 3% increase during the second quarter of fiscal 2017.

Importantly, this is the second consecutive quarter of 2% comps growth in Americas, mirroring concerns that its increased promotions somehow failed to attract a huge number of customers.

Food comps were more than 1% and food has consistently contributed in the 1-2% comps range for many years now. This momentum continued in the quarter as well with food's share of total U.S. sales being 22%, up 100 bps from the prior-year quarter. Meanwhile, iced beverages contributed almost 40% to overall revenue growth.

Membership increased 12% year over year to 14.9 million in the My Starbucks Rewards (MSR) program. Customers in the United States 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 12% of the U.S. transactions, reflecting an increase from 8% a year ago.

Operating margin in the segment, however, contracted 220 bps to 20% as a strong sales leverage was more than offset by the impact of a food-related mix shift and higher spending in its store partners.

China-Asia-Pacific (CAP): Net revenues increased 54% to $1.2 billion on the back of higher revenues from the acquisition of East China operations, new store openings and comps growth.
Comps grew 3%, higher than 1% growth recorded in the first quarter of fiscal 2018. China continued to post impressive comps growth, with 4% improvement witnessed in the quarter (softer than 6% in fiscal first quarter). The softer sequential growth was attributed to a shift in the timing of the Lunar New Year. Meanwhile, Japan delivered its first quarter of positive comps since the first quarter of fiscal 2017, buoyed by a strong beverage lineup.

However, operating margin at the CAP segment contracted 570 bps year over year to 17.2% in the quarter, owing to the impact of its ownership change in East China.

Europe, Middle East and Africa (EMEA): The segment’s net revenues were up 15% from the prior-year quarter at $266.1 million. The improvement was prompted by higher revenues from the addition of new stores and a positive currency effect.

That said, comps declined 1% (compared with a 2% decline in fiscal first quarter).

Operating margin declined 1,360 bps due to a partial impairment of goodwill related to the Switzerland retail business and sales deleverage on company-operated stores.

Channel Development: Net revenues improved 8% to $500.2 million. The growth was driven by higher sales of premium single-serve products.

Operating margin improved 100 bps to 43%.

All-Other: The segment comprises Seattle's Best Coffee, Starbucks Reserve Coffee and Roastery businesses, and Teavana-branded stores. Revenues at the segment decreased 32% to $75.6 million.

Fiscal 2018 Guidance

Starbucks expects global comps growth at the lower end of its earlier projected guidance of 3-5%. The company still expects to add approximately 2,300 net new stores globally. Consolidated revenue growth is expected in high single digits.

The company expects its GAAP EPS in the range of $3.32-$3.36.

Starbucks expects non-GAAP EPS in the range of $2.48-$2.53 compared with $2.30-$2.33 expected earlier. Although the guidance is consistent with the company’s earlier projection, it excludes the impact of its previously announced plan to close more than 8,000 company-owned stores in the United States on May 29, 2018 to conduct racial-bias training for all partners (employees) in the United States.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions higher for the current quarter compared to four lower.

Starbucks Corporation Price and Consensus

 

Starbucks Corporation Price and Consensus | Starbucks Corporation Quote

VGM Scores

At this time, SBUX has an average Growth Score of C, though it is lagging a lot on the momentum front with an F. The stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, SBUX has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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