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Starbucks Remains Neutral

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On Mar 5, we maintained a Neutral recommendation on Starbucks Corporation (SBUX - Free Report) , following its fiscal-first quarter 2013 results, which were in line.

Why the Neutral Recommendation?

The coffee giant’s fiscal-first quarter 2013 earnings of 57 cents per share were in line with the Zacks Consensus Estimate. Earnings grew 14% year over year, almost in line with management’s expectation of being at the lower end of its full-year growth range of 15%–20%. Earnings growth was driven by solid top-line performance and lower taxes, which made up for the unusual cost pressures in the quarter.

Solid comps, strong holiday performance in the U.S., significant innovation, further expansion in China and Asia Pacific and continued momentum in the Channel Development segment drove the 11% top-line growth in the quarter.

Following the flat first-quarter results, the company maintained its previously provided outlook for 2013.

The Zacks Consensus Estimates have seen a mixed movement following the in line results. While those for fiscal 2013 have mostly moved upwards, estimates revisions for fiscal 2014 have seen a mixed trend. Overall, the Zacks Consensus Estimate for both fiscal 2013 and 2014 has remained stagnant over the last 60 days.

Overall, we are encouraged by Starbucks’ strong market standing, new product launches, rapid growth in China, the flourishing CPG business as well as the solid turnaround in its U.S. business. We believe that the company has compelling growth drivers like La Boulange, Verismo, Teavana and K-Cups to sustain earnings momentum in the next few quarters.

However, poor sales in Europe due to the depressed macroeconomic conditions keep us on the sidelines. In the U.S., though some signs of modest economic recovery and improving consumer confidence can be seen, there is still great uncertainty as the fiscal cliff looms. 2013 is also not expected to see any robust economic growth in the U.S.

Other Stocks to Consider

Starbucks carries a Zacks Rank #3 (Hold). Some other retail/restaurant stocks worth considering include Red Robin Gourmet Burgers Inc. (RRGB - Free Report) – Zacks Rank #1 (Strong Buy), Krispy Kreme Doughnuts, Inc. -Zacks Rank #2 (Buy), and Dunkin' Brands Group, Inc. (DNKN - Free Report) - Zacks Rank #2 (Buy), 

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