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Starbucks (SBUX) Up 2.3% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Starbucks (SBUX). Shares have added about 2.3% 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 its most recent earnings report in order to get a better handle on the important drivers.

Starbucks Q2 Earnings Top, Coronavirus to Hurt Future Results

Starbucks reported second-quarter fiscal 2020 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. While the bottom line surpassed the Zacks Consensus Estimate for the second straight quarter, the top line beat the same after missing in the preceding quarter.

However, both the metrics declined sharply year over year owing to the coronavirus pandemic. Comparable store sales were down 50% in China on account of store closures and reduced working hours. Notably, comparable sales from China declined in the quarter after witnessing robust growth in the trailing six quarters. The company anticipates the impact of coronavirus to intensify in third-quarter fiscal 2020 only to moderate in fourth-quarter fiscal 2020. In the quarter under review, the COVID-19 pandemic impacted the company’s performance between two to three weeks. However, it anticipates an impact of 13 weeks in third-quarter fiscal 2020. The impact of the deadly virus is expected lessen in the month of May and June after wreaking havoc in April.

Discussion on Earnings, Revenues & Comps

In the quarter under review, adjusted earnings of 32 cents per share surpassed the consensus mark by a penny. However, the bottom line declined 47% on a year-over-year basis.

Total revenues came in at $5,995.7 million, beating the Zacks Consensus Estimate of $5,736.5 million. However, the top line fell 4.9% from the year-ago level. The downside can be attributed to dismal global retail sales and comparable sales and decline in store traffic.

Global comparable store sales declined 10% against an improvement of 5% in first-quarter fiscal 2020. Global comps declined due to 13% decrease comparable transactions, marginally offset by 4% increase in average ticket.

Starbucks opened 225 net new stores worldwide in the fiscal second quarter, bringing the total store count to 32,050. Global store growth came in at 6%, based on a year-over-year comparison.

Overall Margin Contracts in Q2

On a non-GAAP basis, operating margin contracted 660 basis points year over year to 9.2%. 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, inventory write-offs and store safety items.

Segmental Performance

Notably, 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 at this flagship segment came in at $4,330 million, almost flat year over year. Although the segment revenues in the quarter benefited from 552 net new store opening in a year’s time, it was offset by 3% comparable store sales decline primarily due to the coronavirus outbreak. 

In the first ten weeks of the quarter, the company sustained strong comparable store sales momentum and improved 8%. However, in the final three weeks of the quarter, comparable sales declined sharply owing to the coronavirus pandemic. Due to the outbreak, America’s second-quarter revenues were impacted by nearly $450 million. Moreover, the segment’s non-GAAP operating income was roughly impacted by $420 million.

Adjusted operating margin in the Americas segment contracted 590 bps to 14.4% due to sales deleverage and increase in costs on account of the coronavirus-induced crisis. 

International: Net revenues declined 26% year over year to $1,134.6 million at this segment owing to decrease of 31% in comparable store sales due to the pandemic. Moreover, the decline can be attributed to 4% revenue-dilutive effect of transforming certain retail businesses to fully licensed markets. However, the downside was partially offset by 1,314 net new store openings in a year’s time. 

Moreover, adjusted operating margin in the segment declined to 3.9% from 19.3% in the year-ago quarter owing to sales deleverage. Although stores in most of the markets were closed or operating under modified models, the company had to bear partner wages and benefits and occupancy costs. Margin decline can also be attributable to higher-than-normal sales mix of delivery transactions as customers shifted to off-premise consumption.

Comps in China declined 50%, including 53% transaction decrease owing to store closures and reduced traffic.

The company announced that 98% of its stores in China have commenced operations and anticipates continued improvement in traffic. It stopped new store openings in the second quarter but restarted development activities toward the end of the quarter. The company is on track to open at least 500 net new stores in fiscal 2020, which is over 80% of its original target. 

Channel Development: Net revenues at this segment jumped 16% from the prior-year quarter to $519.1 million. The upside was due to robust performance of the Global Coffee Alliance, which includes additional product sales to Nestlé to transition Foodservice order fulfillment, and benefits associated to the transfer of certain single-serve product activities to Nestlé on a go-forward basis. Moreover, operating margin expanded 320 bps to 36.5%.

Fiscal 2020 Guidance

The company announced that due to the coronavirus pandemic, the company had closed nearly 50% of its company-operated stores in the United States, and above 75% in Canada, Japan and the U.K. Although 98% stores are open in China, these are operating under modified schedules and enhanced safety-related protocols, which includes limited cafe seating.

The company is unable to provide full financial impact the coronavirus as it is unable to ascertain the duration and impact of the outbreak. China comparable store sales, which declined 50% in the second quarter, are expected to decrease in the range of 25% to 30%. This suggests an improvement from the prior quarter. In fourth-quarter fiscal 2020, it will further improve to a decline of 10% to flat year over year. 

The company anticipates Channel Development GAAP revenue decline in the range of 6% to 8%. For fiscal 2020, the company expects capital expenditure to be nearly $1.5 billion.

Other Financial Updates

The company ended the quarter with cash and cash equivalents of $2,572.3 million, compared with $2,686.6 million at the end of Sep 29, 2019. As of Mar 29, 2020, long-term debt stands at $11,658.7 million, compared with $11,167 million as of Sep 29, 2019.

Moreover, the company’s declared a cash dividend of 41 cents per share, payable on May 22, 2020, to shareholders of record as of May 8, 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -292.77% due to these changes.

VGM Scores

At this time, Starbucks has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Starbucks has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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