Starbucks (SBUX) has seen its shares rise to all-time highs, gaining some 30% year to date, besting the 22% rise in the S&P 500 index. Can this outperformance continue?
The premium coffee chain is set to report fourth quarter fiscal 2019 earnings results after Wednesday’s closing bell. The stock appreciation suggests expectations are high not only for this quarter, but also for its outlook for 2020. The company has been in transition for the past couple of years, working to shore up its domestic business, while investing in international markets, aimed at sustaining accelerated pace of revenue growth and same-store sales (SSS).
Amid concerns about U.S. market saturation, Wall Street is now focusing on what the management is doing to offset these concerns. Anywhere there could be a Starbucks, chances are one already exists. Various initiatives include expanding the company’s delivery service, growing its digital relationships and enhancing the company’s in-store experience are expected to keep SSS in positive territory. On Wednesday Starbucks has to show increased returns on these investments, which have come at the expense of subdued margins.
This means growth in overseas markets will be relied upon heavily, namely in China — the company’s main growth region. The company's efforts in China has begun to pay dividends as evidenced by its previous two quarters, during which Starbucks delivered not only double-digit revenue growth but also strong SSS. Betting on the world’s second largest economy has been a good strategy. And with reports of better U.S.-China trade relations, investors will look to see whether Starbucks can build on this momentum.
For the quarter that ended September, Wall Street expects the Seattle, Wash.-based coffee chain to earn 70 cents per share on revenue of $6.68 billion. This compares to the year-ago quarter when earnings were 62 cents per share on revenue of $6.3 billion. For the full year, earnings are projected to rise 16.5% year over year to $2.82 per share, while full-year revenue of $26.43 billion would rise 7% year over year.
The company last quarter impressed with both strong SSS by creating more digital customer relationships. Global Q3 SSS rose 6% to smash the 4% consensus estimate. Just as impressive, average ticket and transaction growth were both up 3% during the quarter. This means not only is the company getting more customers into its stores, customers are also spending more during each visit, which is a great combination. Active membership in Starbucks Rewards in the U.S. surged 14% to 17.2 million during the quarter.
Active members have grown by mid double-digit in the past three quarters, suggesting increased loyalty. While the rewards program is key to the company’s domestic results, Starbucks is investing heavily on its global expansion strategy, including opening 442 new stores in Q2, bringing its global store count to 30,626. The company believes it still has tons of room to grow its global footprint. To the extent the company can execute its global growth strategy, while meeting near-term SSS targets, Starbucks stock still can still work despite trading near all-time highs.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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