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Will Americas Segment Aid Starbucks' (SBUX) Q2 Earnings?

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Starbucks’ SBUX Americas segment, comprising 70% of its total revenues, is expected to witness softer comps growth in the second quarter of fiscal 2018, when it reports on Thursday, Apr 26.

A Look at Starbucks’ Americas Performance in Q1

Net revenues in this flagship segment (inclusive of the United States, Canada and Latin America) were up 7% year over year to $4.3 billion in the preceding quarter. Comps grew 2% in the quarter, softer than 3% growth witnessed in Q4. U.S. comps grew 2%, comprising 2% increase in average ticket. In fiscal 2017, Starbucks’ Americas segment posted 3% comps growth, down considerably from 6% in the year-ago period. In fact, transactions remained unchanged year over year and ticket grew 4%. This compares unfavorably with 5% growth in transaction and an increase of 1% in ticket in fiscal 2016.

In Q1, membership increased 11% year over year in the My Starbucks Rewards (MSR) program. Customers in the United States are using the chain's mobile app to order and pay for their drinks, and are joining the company's rewards program. Mobile payments represented 31% of U.S. transactions, reflecting an increase from 27% a year ago.

Operating margin in the segment, however, contracted 100 basis points to 23%, as strong sales leverage was more than offset by food-related mix shift.

Q2 Expectations

Starbucks’ Americas segment revenues (inclusive of the United States, Canada and Latin America, comprising 70% of its total revenues) are expected to witness 6.9% growth year over year but 6.9% decline sequentially, per the Zacks Consensus Estimate.

Meanwhile, the company expects the first half of the year in Americas comps to be a little below the average for the year, and the second half to be a little bit above.

The company’s segment is likely to experience higher revenues year over year courtesy of additional store openings, Starbucks’ mobile order/pay along with significant innovation in beverages, refreshment, health and wellness, tea and core food offerings. Starbucks has secured a leading position in leveraging its mobile and digital assets and loyalty, and e-Commerce platforms to capitalize on these trends and create more revenue streams to boost its top line.

Apart from the Americas segment, Starbucks’ Channel Development business also needs special mention. Although the business is small (in terms of its revenue contribution), it generates impressive operating margins owing to its cost structure. Hence, the Channel Development segment represents a significant profitable growth opportunity. Channel Development is expected to report revenues of $479 million, higher than $461 million in the year-ago quarter but lower than $560 million in the preceding one.

Revenues in the China-Asia-Pacific segment are likely to witness 47% year-over-year and 34.1% sequential growth. Additionally, the consensus estimate for Europe, Middle East and Africa or EMEA segment revenues of $254 million indicates an increase from $232 million in the year-ago quarter but a decrease from $284 million in the prior quarter.

Overall Earnings & Revenue Expectations

The Zacks Consensus Estimate for earnings of 53 cents reflects 17.8% growth from the prior-year quarter’s profit of 45 cents. Also, the Zacks Consensus Estimate for revenues of $5.91 billion indicates a 11.5% increase on a year-over-year basis.

Starbucks’ operating fundamentals such as solid global retail footprint, successful innovations, best-in-class loyalty program and digital offerings remain strong. Again, digital initiatives like mobile order/pay, delivery services and third-party loyalty partnerships can stimulate stronger sales trends in the Americas. Internationally, the company’s focus on China/Asia expansion is another positive.

Meanwhile, change in the product mix (as food, tea and cold beverages will become an increasing part of the product mix), focus on the use of loyalty cards and mobile order, and pay technology to boost sales and profits are added tailwinds. Finally, Starbucks’ endeavor to boost its presence in premium coffee consumed at home through K-cups and with ready-to-drink beverages needs special attention.

Overall, apart from higher revenues, lower tax rate along with share repurchases will help Starbucks to post higher earnings. That said, headwinds, especially in the labor front, are a cause of concern for this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

(Read More: Starbucks to Report Q2 Earnings: What's in Store?)

Starbucks Corporation Revenue (TTM)


Starbucks Corporation Revenue (TTM) | Starbucks Corporation Quote

Earnings Schedules of Other Major Restaurant Service Providers

McDonald's Corporation MCD and Dunkin' Brands Group, Inc. DNKN are slated to report quarterly numbers on Apr 30 and Apr 26, respectively.

Yum! Brands, Inc. YUM is expected to report quarterly numbers on May 2.

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