Starbucks Corporation (SBUX - Free Report) reported impressive fourth-quarter fiscal 2018 results, wherein both top and bottom line surpassed the respective Zacks Consensus Estimate for the second straight quarter. Results benefited from robust performance by the Americas segment, store openings over a year’s time and ownership change in the East China business. Also, comparable sales form China rebounded, following a decline in the last reported quarter.
Wall Street applauded the company’s remarkable results, with shares gaining more than 9% in after-hours trading on Nov 1. In the past three months, Starbucks has gained 13%, outperforming the industry’s 7.7% growth.
Earnings, Sales & Comps Discussion
Adjusted earnings of 62 cents per share surpassed the consensus mark of 59 cents and grew 13% on a year-over-year basis.
Total sales came in at $6.3 billion, which outpaced the consensus estimate of $6.19 billion and increased 10.6% from the year-ago level. The upside was driven by robust new store performance, comparable sales growth and consolidation of the company’s East China business.
Global comparable store sales increased 3% compared with 1% registered in the third quarter of fiscal 2018. Global comps were driven by a 4% increase in average ticket. However, transactions decreased by 1% compared with a decline of 2% in the preceding quarter.
In the quarter under review, Starbucks opened 604 net new stores worldwide, bringing the total store count to 29,324 across 78 markets. It plans to build 600 net new stores annually in Mainland China, which will double the market's store count to 6,000 across 230 cities from the figure at fiscal 2017 end. In the fourth quarter, the company opened 139 stores in China.
Margin Downtrend Continues
On a non-GAAP basis, operating margin contracted 190 basis points (bps) year over year to 18.1%. The decline can be attributed to an impact of investments associated with the U.S. tax law change, product mix shift largely toward food and planned partner. Rise in costs due to investment in digitalization and unfavorable impact of 40 bps associated to the Nestlé transaction also dented the company’s operating margin. Higher spending in its store partners (employees) along with the impact of its ownership change in the East China business added to the woes. On a GAAP basis, operating margin declined 270 bps to 15.2%.
Starbucks Corporation Price, Consensus and EPS Surprise
Americas: Net sales at this flagship segment increased 8% year over year to $4.25 billion.
Comps rise of 4% in the quarter (up from 2% in the preceding quarter) comprised a 5% increase in average ticket. Additionally, U.S. comps grew 4% compared with 1% registered in third-quarter fiscal 2018.
The company witnessed solid new store contributions, wherein new non-comp stores contributed 4% to revenue growth. Meanwhile, core beverage, which includes espresso, tea and refreshers, reported 3% growth.
Also, membership increased 15% year over year to 15.3 million in the My Starbucks Rewards (MSR) program. Currently, in the United States, customers are using the chain's mobile app to order and pay for their drinks, and join its rewards program. Notably, mobile payments represented 14% of U.S. transactions.
However, operating margin in the segment contracted 110 bps to 21.8% due to the impact of a food and beverage-related mix shift and higher spending in its store partners.
China-Asia-Pacific (CAP): At this segment, net sales were up 41% to $1.21 billion. The upside was driven by increased sales from ownership change in East China, 756 new store openings over the past 12 months and improved comparable store sales. Gains were partially overshadowed by absence of revenues associated to the sale of the company’s Singapore retail operations to a licensed partner.
Comps were up 1% compared to a 1% decline registered in third-quarter fiscal 2018. Increase in comps can be primarily attributed to a 3% rise in comps from China. In the fiscal third quarter, China posted comps decline of 2%.
However, operating margin contracted 440 bps year over year to 19.1% in the quarter due to the impact of its ownership change in the East China business.
Europe, Middle East and Africa (EMEA): Net sales improved 5% year over year to $267.3 million in the segment. The uptick was prompted by higher sales from the addition of 356 new stores in the past 12 months and growth in comps.
That said, comps increased 2% year over year (against flat in the preceding quarter). Operating margin expanded 740 bps to 4% primarily owing to higher business reorganization costs.
Channel Development: Net sales decreased 6% to $539.3 million. The downturn can be attributed to licensing of the company’s CPG as well as foodservice businesses to Nestlé, following completion of the deal on Aug 26, 2018 and the sale of Tazo brand.
Moreover, operating margin contracted 1,060 bps to 35.4%.
Fiscal 2019 Guidance
Starbucks anticipates global comps growth near the lower range of 3-5%. Globally, the company still expects to add approximately 2,100 net new stores. Consolidated revenue growth is projected in the 5-7% band.
GAAP EPS is envisioned in the range of $2.32-$2.37. Non-GAAP EPS is expected in the band of $2.61-$2.66. The Zacks Consensus Estimate for fiscal 2019 is currently pegged at $2.62.
Zacks Rank & Stocks to Consider
Starbucks carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include Dunkin' Brands Group, Inc. (DNKN - Free Report) , Dave & Buster's Entertainment, Inc. (PLAY - Free Report) and Darden Restaurants, Inc. (DRI - 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.
Dunkin' Brands Group has an impressive long-term earnings growth rate of 12.4%.
Dave & Buster's Entertainment delivered positive earnings surprise in each of the trailing four quarters, the average being 13.7%.
Darden Restaurants reported better-than-expected earnings over the preceding four quarters, the average being 5.1%.
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