Coffee chain Starbucks Corporation SBUX had a solid start to the year, up more than 50% since last summer. So far this year, its shares have risen 18.6%, outperforming the broader S&P 500 index, which has risen 16.2%.
But, can Starbucks repeat the stellar performance when it reports fiscal second-quarter earnings results after the closing bell on Apr 25? Quite frankly, there are plenty of reasons to be bullish.
Despite intensifying competition in China, Starbucks’ loyalty program stands in good stead. Its employee-focused stance, share repurchases programs and innovative ideas to improve sales will surely boost second-quarter results. Let’s take a closer look —
Stiff Rivalry in China
China has been home to nearly 500 million middle-class families. And that’s the reason why Starbucks’ management believes that China is the company’s biggest market. At the same time, China is untapped as a coffee market.
But now, Starbucks is facing stiff competition from Chinese coffee joint Luckin Coffee which has introduced coffee at affordable prices. Meanwhile, even though Starbucks provides top-quality coffee beverages, it’s pretty pricey.
Needless to say, Luckin is well poised to come up with an aggressive plan that may make it bigger than Starbucks in China by the end of this year. But does this raise alarm bells for Starbucks? Certainly not!
New Rewards Program
Starbucks is betting on its Rewards loyalty program to help improve earnings results. In the fiscal first quarter, the company witnessed more than 1 million new customers under the program, 14% more than the count registered in the same period last year.
CFO Pat Grismer acknowledged that the Rewards loyalty program has boosted Starbucks' comps growth in the fiscal first quarter. He added that the program will continue to impact Starbucks’ results this time as well. Lest we forget, comps in the United States increased 4% in the fiscal first quarter, more than 3% in the preceding quarter.
Starbucks recently opened its Mobile Order & Pay app to allow non-Rewards members to place orders, which in turn should boost revenues. Further, Starbucks created a venture capital fund — Valor Siren Ventures 1 — in partnership with Valor Equity Partners to invest in food/retail related start-ups. This should boost Starbucks’ bottom line.
Notably, Starbucks has committed to returning $25 billion to shareholders over the three-year period through fiscal 2020. Such share repurchase programs highlight the fundamental strength of the company that should get reflected in the earnings results as well. Notably, the company’s innovative concepts like the “Third Place,” which means customers should consider Starbucks outlets as a third home, after their own homes and workplaces, should go a long way in boosting profits.
Starbucks Will Continue to Rake in Profits
Starbucks is widely expected to post 56 cents a share in earnings, up from 53 cents reported a year ago.
The Zacks Consensus Estimate call for revenues of nearly $6.3 billion, up about 4.6% from the same period last year.
The Zacks Rank #2 (Buy) company also has a positive earnings surprise and js more likely to positively surprise in the future. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
If this wasn’t enough, the Zacks Consensus Estimate for its current year earnings has moved up 0.4% in the past 60 days.
Encouraging earnings performance, undoubtedly, will lead to a rally in the share price. The company’s expected earnings growth rate for the current year is 12.8%, higher than the Retail - Restaurants industry’s estimated rise of 5.3%. In fact, the company has outperformed the broader industry in the past year (+28.6% vs +21.3%).
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