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Starbucks (SBUX) Q2 Earnings Miss, Revenues Top, Shares Rise

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Starbucks Corporation SBUX reported mixed second-quarter fiscal 2022 results, with earnings missing the Zacks Consensus Estimate but revenues beating the same. On a year-over-year basis, earnings declined by a penny but revenues improved 14.5%, given higher U.S. comparable sales.

Following the results, this coffee chain’s shares gained 5.1% in the after-hour trading session on May 3. Investor sentiments were probably boosted by strong U.S. comparable sales despite higher-than-expected inflationary pressures, increased costs due to Omicron and a tight labor market. Although the overseas division suffered from increasing restrictions in China and elsewhere, its U.S. rebound was encouraging.

Nevertheless, Rachel Ruggeri, the chief financial officer, stated, “We are confident that the investments in our partners, our stores and our brand that we announced today will deliver returns in excess of historic levels and accelerate our growth long into the future.”

Discussion on Earnings, Revenues & Comps

In the quarter under review, the company reported adjusted earnings per share (EPS) of 59 cents, missing the Zacks Consensus Estimate of 60 cents by 1.7%. The bottom line decreased 3.3% year over year from an adjusted EPS of 61 cents reported in the prior-year quarter.

Quarterly revenues of $7,635.6 million beat the Zacks Consensus Estimate of $7,606 million by 0.4%. The top line increased 14.5% on a year-over-year basis. The upside was primarily driven by solid revenue contribution from the U.S. and stellar performance across its diverse global portfolio. The solid performance of new U.S. company-operated stores (part of the North America Trade Area Transformation initiative) added to the positives.

Global comparable store sales increased 7% year over year. The upside was primarily driven by a 3% rise in comparable transactions and a 4% increase in average ticket.

Starbucks opened 313 net new stores worldwide in the fiscal second quarter, bringing the total store count to 34,630. Global store growth came in at 5.1% on a year-over-year basis.

Starbucks Corporation Price, Consensus and EPS Surprise

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

Starbucks Corporation price-consensus-eps-surprise-chart | Starbucks Corporation Quote

Overall Margin Falls in Q2

On a non-GAAP basis, the operating margin during the fiscal second quarter came in at 13%, down from 16% reported in the prior-year quarter. The downside was primarily caused by inflationary pressures along with increased investments in store partner wages and benefits. Also, reduced traffic in China added to the woes. However, this was partially offset by higher pricing in North America.

Segmental Details

Starbucks has three reportable operating segments: North America, International and Channel Development.

North America: The segment’s fiscal second-quarter net revenues came in at $5,445.7 million, up 17% year over year. The segment benefited from 12% growth in company-operated comparable store sales, new store growth and higher contribution from licensed store sales.

Operating margin in the North American segment came in at 17.1% compared with 19.3% reported in the prior-year quarter. The contraction was due to the rise in supply chain costs (on account of inflationary pressures and higher spending on new partner training) and investments in retail store partner wages. Onboarding and support costs to address labor market conditions, along with lapping prior-year government subsidies added to the woes. These were partly offset by sales leverage and pricing, coupled with lower restructuring expenses related to the North America Trade Area Transformation.

International: The segment’s fiscal second-quarter net revenues came in at $1,702.4 million (highest second-quarter revenues), up 4% year over year. The segment benefited from 9% store growth (over the past 12 months), higher product sales and royalty revenues from its licensees. The conversion of the Korea market from a joint venture to a fully licensed market in the fourth quarter-fiscal 2021 added to the positives. However, an 8% decline in comparable-store sales partly offset the above-mentioned positives due to COVID-19 related restrictions in China, the lapping of prior-year’s VAT benefit in China and the impact of unfavorable foreign currency translation.

Operating margin in the segment contracted 520 basis points (bps) year over year to 10.6%. The downside can be attributed to investments in strategic initiatives, store partner wages and benefits as well as higher profit and distribution costs from a sales mix shift. However, this was partially offset by lower amortization expenses.

During the fiscal second quarter, comps in China declined 23% year over year. The downtick was caused by a 4% decline in average tickets and a 20% fall in transactions. China continues to battle COVID resurgences and navigate through prolonged lockdowns.

Channel Development: Net revenues in the segment increased 25% from the prior-year quarter’s figure to $463.1 million. The upside was primarily driven by growth in its ready-to-drink business and Global Coffee Alliance.

The segment’s operating margin, however, contracted 400 bps to 42.7%. The decline was mainly due to a fall in income from the North American Coffee Partnership joint venture, primarily on account of supply chain constraints, inflationary pressures and a business mix shift.

Financial Details

The company ended the second quarter with cash and cash equivalents of $3,913.4 million compared with $6,455.7 million at the end of Oct 3, 2021. As of Apr 3, 2022, long-term debt totaled $14,014.4 million compared with $13,616.9 million as of Oct 3, 2021.

Meanwhile, the company announced a suspension of its share repurchase program in April but repurchased 5.2 million shares in the quarter prior to the announcement. At the end of the fiscal second quarter, SBUX had approximately 52.6 million shares remaining under its repurchase authorization.

Meanwhile, the company declared a quarterly cash dividend of 49 cents per share. The dividend is payable May 27, 2022, to shareholders of record as of May 13, 2022.

Other Updates

Starbucks Rewards loyalty program’s 90-day active members in the United States increased to 26.7 million, reflecting an increase of 17% year over year.

SBUX has identified more than $200 million of investment (in addition to the significant investments it has already committed to its U.S. company-operated stores this year). These include further investments in training, wage and equipment and new investments in internal communication with its people, where it aims to launch a new partner app to communicate directly with all store partners.

Fiscal 2022 Guidance

Given the ongoing uncertainty around China, increasing inflation and the significant investments that the company has been planning, SBUX management has suspended guidance for Q3 and Q4 for the time being.

SBUX believes that the balance of the year will be under massive pressure, especially in Q3. From a capital allocation perspective, although the company has suspended share repurchases for the balance of this fiscal year, it has returned more than $5 billion through share repurchases and quarterly dividend during the first half of fiscal 2022. SBUX expects share repurchases made earlier in the year to contribute at least 1% to fiscal 2022 EPS growth.

The company intends to provide a comprehensive update on its business outlook for fiscal 2023 and beyond at its Investor Day in September.

Zacks Rank & Key Picks

Starbucks currently carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space are BBQ Holdings, Inc. BBQ, Dave & Buster's Entertainment, Inc. PLAY and Arcos Dorados Holdings Inc. ARCO.

BBQ Holdings sports a Zacks Rank #1 (Strong Buy). BBQ Holdings has long-term earnings growth of 14%. Shares of the company have increased 10.9% in the past year.

The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and EPS suggests growth of 40.9% and 66.2%, respectively, from the year-ago levels.

Dave & Buster's sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 212%, on average. Shares of the company have increased 3.4% in the past year.

The Zacks Consensus Estimate for Dave & Buster's current-year sales and EPS suggests growth of 27.2% and 51.1%, respectively, from the year-ago levels.

Arcos Dorados sports a Zacks Rank #1. Arcos Dorados has a long-term earnings growth rate of 31.3%. Shares of the company have risen 27.1% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 16.6% and 66.7%, respectively, from the year-ago levels.


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