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Starbucks (SBUX) Q1 Earnings & Revenues Surpass Estimates

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Starbucks Corporation (SBUX - Free Report) reported impressive first-quarter fiscal 2019 results, wherein both top and bottom line surpassed the respective Zacks Consensus Estimate for the third straight quarter. Results benefited from robust performance by the Americas and China-Asia-Pacific segment and store openings. Ownership change in the East China business and robust performance during the holiday season too aided the company’s quarterly performance. Meanwhile, comparable sales from China increased for the second straight quarter.

Wall Street applauded the company’s remarkable results, with shares gaining 2% in after-hours trading on Jan 24. In the past six months, Starbucks has rallied 29.9%, outperforming the industry’s 15.3% growth.

Earnings, Revenues & Comps Discussion

Adjusted earnings of 75 cents per share surpassed the Zacks Consensus Estimate of 65 cents and grew 15.4% on a year-over-year basis.

Total revenues came in at $6.6 billion, which outpaced the consensus estimate of $6.5 billion and increased 9% from the year-ago level. The upside was driven by robust new store performance, comparable sales growth, consolidation of the company’s East China business and streamline-driven activities.

Global comparable store sales increased 4% compared with 3% registered in the fourth quarter of fiscal 2018. Global comps were driven by a 3% increase in average ticket. However, transactions remained flat compared with a 1% decline in the preceding quarter.

In the quarter under review, Starbucks opened 541 net new stores worldwide, bringing the total store count to 29,865 across 78 markets. The company said that more than two-thirds of the net new stores were opened internationally. 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 by 2023 from the figure at fiscal 2017 end. In first-quarter fiscal 2019, the company opened 259 stores in China.

Margin Contraction Continues

On a non-GAAP basis, operating margin contracted 180 basis points (bps) year over year to 17.4%. The impact of investments associated with the U.S. tax law change and strategic investments in the company’s cyber retail business resulted in the downturn. Rise in costs due to investment in digitalization 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 310 bps to 15.3%.

Starbucks Corporation Price, Consensus and EPS Surprise

Segmental Performance

Americas: Net revenues at this flagship segment increased 8% year over year to $4.6 billion driven by 807 new stores opened in the quarter.

Comps growth of 4% in the quarter comprised a 4% increase in average ticket. Additionally, U.S. comps improved 4% in the same time period.

Markedly, segmental growth was driven by robust performance of beverage — the company’s highest margin category. Meanwhile, core beverage, which includes espresso, tea and refreshers, reported 3% growth.

Also, membership increased 14% year over year to 16.3 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.

However, operating margin in the Americas segment contracted 100 bps to 22% due to the impact of a food and beverage-related mix shift, increase in restructuring costs and asset impairments as well as higher spending in its store partners.

China-Asia-Pacific (CAP): At this segment, net revenues were up 45% to $1.2 billion. The upside can be attributed to increased sales from ownership change in East China, 1,010 new store openings over the past 12 months and improved comparable store sales.

Comps were up 3% compared with a 1% gain registered in fourth-quarter fiscal 2018. Increase in comps was on account of  a 1% rise in comps from China and mid-single digit comps growth in Japan. In the fiscal fourth quarter, China posted comps growth of 3%.

However, operating margin contracted 530 bps year over year to 18% in the quarter under review due to the impact of its ownership change in the East China business.

Europe, Middle East and Africa (EMEA): Net revenues dropped 1% year over year to $266.3 million at this segment. The downside can be attributed to foreign currency headwinds, which overshadowed higher sales from the addition of 324 new stores in the past 12 months and comps growth.

That said, comps decreased 1% year over year (against 2% gain in the preceding quarter). On the flip side, operating margin expanded 200 bps to 10.1% primarily owing to higher business reorganization costs.

Channel Development: Net revenues at this segment decreased 20% to $504.6 million. The downturn was due 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 810 bps to 34.8%.

Fiscal 2019 Guidance

Starbucks reiterated its fiscal 2019 guidance. The company continues to anticipate global comps growth near the lower range of 3-5%. Globally, it still expects to add approximately 2,100 net new stores. Consolidated GAAP revenue growth is projected in the 5-7% band.

GAAP EPS is envisioned in the range of $2.32-$2.37. However, non-GAAP EPS is expected in the band of $2.68-$2.73, up from $2.61-$2.66 guided earlier. The Zacks Consensus Estimate for fiscal 2019 is currently pegged at $2.64.

Zacks Rank & Stocks to Consider

Starbucks carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include Wingstop Inc. (WING - Free Report) , Darden Restaurants, Inc. (DRI - Free Report) and The Habit Restaurants, Inc. , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Wingstop earnings have surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 12.8%.

Darden Restaurants’ long-term earnings is expected to grow by 10%.

Habit Restaurants long-term earnings is anticipated to grow by 20%.

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