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Starbucks' (SBUX) Q4 Earnings Match Estimates, Stock Up

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Starbucks Corporation (SBUX - Free Report) reported fourth-quarter fiscal 2019 results, wherein earnings met the Zacks Consensus Estimate, after outpacing the same for five straight quarters. Meanwhile, revenues surpassed the consensus mark during the reported quarter. With this, revenues topped analysts’ expectations in six of the trailing seven quarters.

Following the solid quarterly performance, shares of Starbucks gained almost 3% in after-hours trading on Oct 30.

The quarterly results benefited from robust performance of Americas and China-Asia-Pacific segments, store openings, enhanced customer experience, as well as digitalization. Furthermore, the company witnessed strong demand for new beverages in the United States and China. Meanwhile, comparable sales from China increased for the fifth straight quarter.

Discussion on Earnings, Revenues & Comps

In the quarter under review, adjusted earnings of 70 cents per share met the consensus mark but increased 12.9% on a year-over-year basis.

Total revenues came in at $6,747 million, which outpaced the consensus estimate of $6,660 million by 1.1% and increased 7% from the year-ago level. The upside was driven by robust global retail sales, comparable sales growth and streamline-driven activities.

Global comparable store sales increased 5% compared with 6% improvement in the second quarter of fiscal 2019. Global comps were driven by a 3% increase in average ticket and 2% improvement in comparable transactions.

Starbucks opened 630 net new stores worldwide in the fiscal fourth quarter, bringing the total store count to 31,256. Global store growth came in at 7%, based on a year-over-year comparison.

Starbucks Corporation Price, Consensus and EPS Surprise


Starbucks Corporation Price, Consensus and EPS Surprise

Starbucks Corporation price-consensus-eps-surprise-chart | Starbucks Corporation Quote

Overall Margin Contraction Continues

On a non-GAAP basis, operating margin contracted 90 basis points (bps) year over year to 17.2%. The downturn was largely due to the impact from factors comprising streamline-driven activities, U.S. tax reform-funded investments, Siren Retail and one-time investment in the Chicago leadership conference. After adjusting for all these items, non-GAAP operating margin was up 40 bps in the quarter, reflecting the benefits of sales leverage and productivity improvements.

Segmental Performance

Notably, in fourth-quarter fiscal 2019, the company realigned its operating segments. Specifically, the China/Asia Pacific segment and Europe, Middle East and Africa segment have been combined into one International segment.

Results of Siren Retail — which is a non-reportable operating segment consisting of Starbucks ReserveTM Roastery & Tasting Rooms, Starbucks Reserve brand and Princi operations — were previously included within Corporate and Other. It will now report within Americas and International segments based on the geographical location of operations.

Americas: Net revenues at this flagship segment increased 9% year over year to $4,651.4 million, driven by 607 store openings in a year’s time and comps growth of 6% in the quarter under review.

Markedly, segmental growth was driven by robust performance of beverage — the company’s highest margin category. Growth was also favored by an improved in-store experience and digital initiatives. Starbucks’ cold beverage platform grew across all dayparts led by cold coffee, refreshment and tea. The Nitro Cold Brew platform, which reached full penetration of its company-operated stores by the end of the fiscal fourth quarter, continued to be well received. Beverage and food contributed five points and one point of comps growth, respectively, during the quarter.

Operating margin in the Americas segment contracted 70 bps to 20.2% due to the 2019 Starbucks Leadership Experience, higher wages and increased investments in labor hours.

International: Net revenues grew 6% year over year to $1,572.1 million at this segment. After adjusting for the unfavorable impact of streamline-related activities and foreign exchange at 5% and 1% respectively, revenues grew 12% year over year in the quarter. The upside was mainly driven by 11% store growth and comps growth of 3% in the quarter under review.

Also, operating margin in the segment expanded 180 bps to 16.7% on the back of sales leverage, cost-saving initiatives, labor efficiencies and the impact of conversion of certain retail businesses to fully-licensed markets.

In China, which is the company’s main international market, new store development continues to be the number one growth factor. Its store count increased 17% from the prior-year figure.

Comps growth was 5% in China that includes 2% transaction growth, driven by strength in digital customer engagement, primarily owing to growth of delivery, the Starbucks Rewards loyalty program and MOP.

Channel Development: Net revenues at this segment decreased 6% from the prior-year quarter to $508.1 million. The downturn was due to licensing of the company’s CPG and foodservice businesses to Nestlé, following completion of the deal on Aug 26, 2018. Nonetheless, operating margin expanded 220 bps to 37.6%, attributable to lapping prior-year costs associated with the establishment of the Global Coffee Alliance, including business taxes related to the up-front payment and employee-related costs.

Fiscal 2019 Highlights

Full-year adjusted earnings came in at $2.83 per share, reflecting an increase of 17% from fiscal 2018. Revenues grew 7% in the year to $26.5 billion. After adjusting for unfavorable impact of approximately 2% from Streamline-driven activities and 1% from foreign currency translation, revenues grew 10% year over year. Globally, comps growth was 5% from a year ago, driven by a 3% increase in average ticket and 1% improvement in comparable transactions.

Non-GAAP operating margin declined 80 bps to 17.2% during the period. After adjusting for unfavorable impact from Streamline-driven activities, the metric declined 10 bps.

Fiscal 2020 Guidance

Starbucks anticipates global comps growth in the range of 3-4%. Globally, it expects to add approximately 2,000 net new stores (600 in Americas and 1,400 in International markets). Consolidated GAAP revenue growth is projected within 6-8%.

GAAP EPS is envisioned in the band of $2.84-$2.89. Also, non-GAAP EPS is expected within $3.00-$3.05. The Zacks Consensus Estimate for fiscal 2020 earnings is currently pegged at $3.07, higher than the company’s projected range.

Zacks Rank & Peer Releases

Starbucks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

YUM! Brands, Inc.’s (YUM - Free Report) third-quarter 2019 earnings and revenues lagged analysts’ expectations, and declined on a year-over-year basis, thanks to a write down in the value of its investment in GrubHub Inc.

Domino's Pizza, Inc. (DPZ - Free Report) reported mixed third-quarter 2019 financial numbers, wherein earnings surpassed the Zacks Consensus Estimate but revenues were almost in line with the same. Notably, this marked the company’s third straight quarter of earnings beat.

McDonald's Corporation (MCD - Free Report) reported third-quarter 2019 results, wherein earnings and revenues missed the Zacks Consensus Estimate. The bottom line also declined 2% from the prior-year figure.

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