A month has gone by since the last earnings report for Starbucks (SBUX). Shares have added about 6.5% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Starbucks due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Starbucks Beat Q3 Earnings Estimates
Starbucks reported third-quarter fiscal 2020 results, with earnings and revenues surpassing the Zacks Consensus Estimate. While the bottom line surpassed the Zacks Consensus Estimate for the third straight quarter, the top line beat the same for the second straight quarter.
The company stated that of the 3,100 U.S. stores that remained opened throughout the third quarter, it witnessed comps decline of 14% and 1% in May and June, respectively. For July month-to-date, comps increased 2%. The company continues to benefit from robust drive-thru and deliver options. Mobile ordering in the third quarter increased 6 percentage points from a year ago to make up 22% of total transactions.
The company noted that due to the coronavirus pandemic the company had lost nearly $3.1 billion in consolidated revenues. The downside was primarily caused by store closures, limited sales channels, reduced operating hours and dismal customer traffic.
Discussion on Earnings, Revenues & Comps
In the quarter under review, the company reported adjusted loss per share of 46 cents per share, narrower than the Zacks Consensus Estimate of loss per share of 61 cents. In the prior-year quarter, the company had reported adjusted earnings per share of 78 cents.
Total revenues came in at $4,222.1 million, which beat the Zacks Consensus Estimate of $4,111 million. However, the top line fell 38.1% from the year-ago quarter’s level. The downtick was due to dismal global retail sales and comparable sales and decline in store traffic.
Global comparable store sales declined 40% compared with a decline of 10% in second-quarter fiscal 2020. Global comps declined due to 51% fall in comparable transactions, marginally offset by 23% increase in average ticket.
Starbucks opened 130 net new stores worldwide in the third quarter, bringing the total store count to 32,180. Global store growth came in at 5%, based on a year-over-year comparison.
Overall Margin Contracts in Q3
On a non-GAAP basis, operating margin came in at 12.6% compared with 18.3% reported in the prior-year quarter. The downtrend was primarily due to sales deleverage and rise in costs induced by the coronavirus pandemic.
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 Reserve TM Roastery & Tasting Rooms, Starbucks Reserve brand and Princi operations — were previously included within Corporate and Other. It now reports within Americas and International segments based on the geographical location of operations.
Americas: Net revenues in this flagship segment came in at $2,805.5 million, down 40% year over year. Although the segment revenues in the quarter benefited from 382 net new store opening in a year’s time, it was offset by 41% comparable store sales decline primarily due to the coronavirus outbreak.
Due to the pandemic, America’s fiscal second-quarter revenues were impacted by nearly $2.3 billion. Moreover, the segment’s operating income was roughly impacted by $1.5 billion.
Adjusted operating margin in the Americas segment contracted to 14.4% compared with 21.8% in the prior-year quarter. The downtrend can primarily be attributed to sales deleverage and rise in costs due to the coronavirus pandemic, mostly catastrophe wages, and heightened pay programs and additional benefits in support of retail store partners and store safety items.
International: Net revenues declined 40% year over year to $949.6 million in the segment, thanks to decline of 37% in comparable store sales stemming from the pandemic and decline in product sales to the company’s licensees. Moreover, the decline was due to 2% revenue-dilutive effect of transforming Thailand to a fully-licensed market in fiscal 2019. However, the downside was partially offset by 1,172 net new store openings in a year’s time.
Moreover, adjusted operating margin in the segment fell to 9.1% from 17.1% in the year-ago quarter owing to sales deleverage. Moreover, royalty relief granted to international licensees as well as additional costs incurred, which includes catastrophe wages, marginally overshadowed by temporary government subsidies and rent concessions.
Comps in China declined 19%, including 27% transaction fall due to store closures and reduced traffic.
The company announced that 99% of its stores in China have commenced operations and anticipates continued improvement in traffic.
Channel Development: Net revenues in the segment declined 16% from the prior-year quarter’s figure to $447.3 million. The decline was primarily due to nearly 21% unfavorable impact of Global Coffee Alliance transition-related activities, which includes lapping higher inventory sales in the prior-year quarter as Nestlé prepared to fulfill customer orders. Moreover, operating margin contracted 630 basis points to 27.8%.
The company provided fiscal 2020 guidance, wherein it anticipates the negative impact of the coronavirus pandemic to moderate in fourth-quarter fiscal 2020. The company expected global comparable sales to decline 12% and 17% in the fourth quarter and fiscal 2020, respectively. Moreover, the company anticipates Americas and U.S. comparable store sales decrease of 12% to 17% in the fourth quarter and 2020, respectively. Earlier, the company had anticipated comps decline of 10% to 20% for the fourth quarter and full year.
For the fourth quarter, international comps are expected to decline 10% to 15% compared with the prior estimate of 10% to 20%. For fiscal 2020, the company anticipates international comps to decline 20% to 25% compared with the prior estimate of decline of 20% to 30%.
In China, comps are expected to be flat to down 5% in fourth quarter compared with the prior estimate of flat comps. For fiscal 2020, comps are expected to be down 15% to 20% compared with prior estimate of decline of 10% to 20%.
Starbucks expects consolidated revenues decline of 10-15% for the fourth quarter. Non-GAAP earnings fomarginr the fourth quarter are anticipated to be 18-33 cents, whereas for full year it is expected in the range of 83-93 cents. The Zacks Consensus Estimate for the fourth quarter and fiscal 2020 are currently pegged at 27 cents and 80 cents, respectively.
Other Financial Updates
The company ended the quarter with cash and cash equivalents of $3,965.9 million compared with $2,686.6 million at the end of Sep 29, 2019. As of Jun 28, 2020, long-term debt is at $14,645.6 million compared with $11,167 million as of Sep 29, 2019.
Moreover, the company declared a cash dividend of 41 cents per share, payable on Aug 21, to shareholders of record as of Aug 7.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 12.91% due to these changes.
At this time, Starbucks has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Starbucks has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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