North America

Earnings Preview: Starbucks Q3 2017 (SBUX)

By: Craig Bowles

Overview

Starbucks, Corp. (SBUX) is slated to report 3Q 2017 earnings after the bell on Thursday, July 27th. The earnings release is expected at approximately 4:05 p.m. ET with a conference call to follow at 5:00 p.m. that is webcast through Starbucks Investor Relations. Starbucks is a component of the S&P 500 and NASDAQ 100 indices, so results can impact index futures. Starbucks announced a two-for-one stock split on March 18, 2015.

Outliers & Strategy

Key measures:

  • Non-GAAP Earnings Per Share (EPS) and Earnings Per Share (EPS) Excluding Items: The current Street estimate is $0.55 (range $0.54 – $0.56). (Source: Yahoo! Finance).  Consensus was $0.55 three months ago, as well. If an adjusted number is unavailable, the Earnings Per Share (EPS) number would be comparable to consensus estimates.
  • Revenues: Analysts expect an increase of 9.8% y/y to $5.75 bln (range $5.62 bln to $5.90 bln).
  • Comparable Sales: Expectations have been for a pickup in the June qtr. Q2 and Q1 were 3% after the previous two quarters at 4%.

Adjusted Earnings Per Share (EPS) Guidance (now only given on the conference call):

  • Adjusted Earnings Per Share (EPS) Guidance (FY 2017): Company guidance for Adjusted EPS is $2.08 to $2.12. The current Street estimate is $2.10.
  • Starbucks’ Price/Book of 15.0 compares to a 5-year average of 11.4; Price/Sales of 3.9 vs 5-year average 3.8; Price/Cash Flow of 19.7 vs 5-year average 48.4; Dividend yield of 1.6% compares to a 5-year average of 1.3%.
  • Analysts are bullish on Starbucks with 25 Buy, 6 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 196,371 shares the last three months and a net 1,785,993 shares in the past year. (source: NASDAQ.com) In July 2015, Starbucks approved an additional 50 million shares stock buyback on top of the 11 million shares available in the old plan. 2016 had close to $2 bln spent on stock buybacks.
  • Coffee prices rebounded in 2016 until November’s reversal that has carried over in 2017. (Chart)
  • Starbucks is compared to major coffee retailers with quarterly results possibly impacting Dunkin’ Brands Group (DNKN), Green Mountain Coffee Roasters (GMCR) and new entry McDonald’s (MCD).
  • Starbucks shares have shown a 1-day average price change on earnings of 2.21%. Options are pricing in an implied move of 3.86% off earnings.

Recent News

  • 07/07: Bernstein points out that Starbucks and Costa (a British coffee giant) have seen domestic sales growth slow in the past two years, which correlates with the rise in popularity of independent coffeehouses in big cities. Even so, Starbucks should be fine on a national (or global) scale, according to a post on Barron’s.com.
  • 07/06: Starbucks mobile ordering continues to grow in popularity, causing problems in the short term as same store sales slowed due to longer wait times. Mizuho maintained a Buy rating and believes the growing pains are worth it, according to a post on Barron’s.com.
  • 06/14: Wedbush downgraded Starbucks to Neutral from Outperform on concerns that investors are expecting a larger sales acceleration than the company can deliver, according to a post on Barron’s.com.
  • 06/09: Bernstein reiterated a Buy rating on Starbucks after CEO Kevin Johnson to discuss his vision for greater “focus, empowerment, and accountability,” according to a post on Barron’s.com.
  • 05/15: Deutsche Bank upgraded Starbucks to Buy from Hold following a year of transition citing the combination of its longer-term investments, structural and strategic moves, according to a post on Barron’s.com.

Technical Review

Starbucks third leg up of this expansion made a similar move up as the first leg, so this resistance in the $60 area remains an issue since October 2015’s $63.84.  The stock got as high as $64.87 in early June. Balance area support in the $56-57 area is similar to the 200-day moving average. (Chart courtesy of StockCharts.com)

 

Summary

Kevin Johnson began his new role as Starbucks’ CEO in April. Despite losing market share to lower priced single serving producers, the company is bringing more higher-priced “premium” products to their stores. Starbucks guidance predicts that this year will see “mid-single digit comparable store sales growth globally.”  Solid growth prospects and share buybacks have analysts mostly bullish on the stock. The company has reported earnings similar to consensus three of the last four quarters and beaten by 1c the other quarter. Estimize consensus for a Non-GAAP EPS of $0.56 on revenue of $5.742 bln compares to analyst consensus of $0.55 on revenue of $5.75 bln. Comparable store sales will be of interest and guidance will only be available on the conference call.

 

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