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Starbucks (SBUX) Q1 Earnings in Line, Stock Hit by View Cut

Starbucks CorporationSBUX lost 3.95% in after-hours trading following its first quarter of fiscal 2017 financial and operating results.

Although the coffee chain giant's earnings managed to meet the consensus mark, revenues missed the same. Comparable store sales or simply comps were particularly disappointing. It marked one of the company's worst comps growth since 2009.

Earnings, Sales & Comps Discussion

Adjusted EPS of 52 cents was in line with the Zacks Consensus Estimate, but grew 13% year over year.

Total first-quarter sales of $5.73 billion increased 7% year over year, driven by higher store openings (2,163 net new stores launched over the past 12 months) and global comps growth. Revenues, however, missed the Zacks Consensus Estimate of $5.83 billion by 1.7%. Higher sales in the U.S., China/Asia Pacific as well as Channel Development segments have made up for a slowdown in the Europe, Middle East, and Africa ("EMEA") division.

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Same-store sales (comps) grew 3%, down from the previous quarter growth of 4% due to cooling global traffic trends. Global traffic decreased 1% in the quarter, same as the previous quarter. Average ticket growth was 4%, lower than the 6% increase in the previous quarter.

Margins

Operating margin showed a 10 basis points (bps) increase in year-over-year growth to 19.8% in the quarter as improved sales leverage and lower commodity costs, mainly coffee, offset higher employee investments, primarily in the Americas segment.

Segment Details

Americas: Net revenue in this flagship segment rose 7% year over year to $3.99 billion.

Comps rose 3% in the quarter, less than 5% last quarter. The U.S. comps decelerated from the fourth quarter and posted 3% growth that includes 5% rise in tickets and 2% decline in transactions.

Notably, despite the change to the rewards program, Starbucks' membership was up 16% year over year to 12.9 million members at the My Starbucks Rewards (MSR) program in the quarter. Customers in the U.S. are using the chain's mobile app to order and pay for their drinks and to join the company's rewards program. Mobile Mobile Order and Pay represented 7% of U.S. transactions, up from 3% a year ago. Meanwhile, Mobile Payment accounted for 27% of U.S. company-operated transactions.

Operating margin plunged 110 bps to 24% in the quarter as sales leverage were offset by higher investments.

Europe, Middle East and Africa (EMEA): Net revenue declined 16% year over year to $262.4 million due to portfolio shift to licensed stores including the sale of the Germany outlet. Moreover, unfavorable foreign currency translation has hurt results.

Comps declined 1%, same as the last quarter, due to a slowing economy, Brexit-related political uncertainty and recent terror attacks in the region.

Operating margin, however, improved 140 bps to 16.8% mainly due to sales leverage owing to the shift in the portfolio toward more licensed stores.

China-Asia-Pacific (CAP): Net revenue rose 18% to $770.8 million on the back of higher revenues from new store openings and favorable foreign currency translation.

Comps grew 5%, higher than 1% growth seen in the previous quarter. It includes 2% growth in traffic and 3% rise in ticket.

Operating margin at the CAP segment rose 180 bps year over year to 21.2% as higher JV income and changes in certain business tax structures in China countered the currency headwinds.

Channel Development (CPG): This segment includes roasted whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages (like Frappuccino and Starbucks Refreshers) and Starbucks and Tazo branded K-Cup packs sold through channels such as grocery, specialty retailers, and foodservice, to name a few.

Channel Development's net revenue grew 8% year over year to $553.7 million on the back of higher sales of premium single-serve, packaged coffee products, international and foodservice.

Operating margin rose 620 bps to 43.9% driven by higher profits from the North American Coffee Partnership (NCAP) with PepsiCo, Inc, (PEP) and lower coffee costs.

All-Other: The segment comprises emerging brands like Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution Fresh and Digital Ventures. Revenues at the segment decreased 8% to $154.6 million.

Fiscal 2017 Guidance

For fiscal 2017, the company reaffirmed its non-GAAP earnings at the range of $2.12-$2.14 per share.

Starbucks also maintained its expectations for mid-single digit comparable store sales growth globally.

However, full-year revenue growth is now expected to grow between 8% and 10%, down from the original guidance that called for double-digit growth.

Starbucks Corporation Price, Consensus and EPS Surprise

Starbucks Corporation Price, Consensus and EPS Surprise | Starbucks Corporation Quote

Our Take

Despite Starbucks' strong quarterly performance, it missed expectations on a number of fronts. The company's disappointing figures probably hint at headwinds that the coffee giant may face going ahead amid the persistent decline in restaurant sales and apprehensions surrounding Howard Schultz's stepping down.

Zacks Rank & Key Picks

Starbucks carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Retail-Restaurants space include:

Dave & Buster's Entertainment, Inc. PLAY , sporting a Zacks Rank #1 (Strong Buy),has seen current year estimates rise 6.2% over the last 60 days. You can see the complete list of today's Zacks #1 Rank stocks here .

Bob Evans Farms, Inc. BOBE is a Zacks Rank #1 company. Its earnings surpassed the Zacks Consensus Estimate in all of the last four quarters, with an average beat of 14.74%.

Peer Release

McDonald's Corp. MCD posted strong results in the fourth quarter of 2016, wherein both the bottom and the top line outpaced the Zacks Consensus Estimate.

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Starbucks Corporation (SBUX): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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