Starbucks Corporation SBUX reported fourth-quarter fiscal 2020 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. While the bottom line beat the Zacks Consensus Estimate for the fourth straight quarter, the top line outpaced the same for the third consecutive quarter.
However, both the metrics declined sharply year over year due to the coronavirus pandemic. Despite reporting better-than-expected results, the company’s shares declined 0.5% in after-hour trading session as earnings estimates for the first quarter and fiscal 2021 were below the analyst estimates.
Management noted that the company had lost nearly $1.2 billion in sales due to the coronavirus pandemic. The downside was primarily because of 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 earnings per share of 51 cents beating the Zacks Consensus Estimate of 33 cents. In the prior-year quarter, the company had reported adjusted earnings per share of 70 cents.
Total revenues were $6,203.1 million, which surpassed the Zacks Consensus Estimate of $6,076 million. However, the top line fell 8.1% from the year-ago quarter. The downside was due to dismal global retail and comparable sales, and decline in store traffic.
Global comparable store sales fell 9% compared with a decline of 40% in third-quarter fiscal 2020. Global comps declined due to 23% fall in comparable transactions, marginally mitigated by 17% increase in average ticket.
Starbucks opened 480 net new stores worldwide in the fourth quarter, bringing the total store count to 32,660. Global store growth came in at 4%, on a year-over-year basis.
Starbucks Corporation Price, Consensus and EPS Surprise
Starbucks Corporation price-consensus-eps-surprise-chart | Starbucks Corporation Quote
Overall Margin Contracts in Q4
On a non-GAAP basis, operating margin came in at 13.2% compared with 17.2% in the prior-year quarter. The downtrend can be attributed to sales deleverage and material investments in retail partner support.
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 were $4,232.9 million, down 9% year over year. Although the segment revenues in the quarter benefited from 287 net new store openings in a year’s time, it was offset by 9% comparable store sales decline, and decrease in product sales and royalty revenues from its licensees due to the coronavirus outbreak.
Adjusted operating margin in the Americas segment contracted to 12.1% compared with 20.2% in the prior-year quarter. The downtrend can primarily be attributed to increase in expenses owing to Americas store portfolio optimization, sales deleverage and additional costs incurred owing to the pandemic and increase in retail partner benefits and wages.
International: Net revenues fell 5% year over year to $1,492.3 million in the segment, thanks to decline of 10% in comparable store sales stemming from the pandemic and decrease in product sales to the company’s licensees. However, the downside was partially offset by 1,117 net new store openings in a year’s time.
Moreover, adjusted operating margin in the segment fell to 12% from 16.7% in the year-ago quarter owing to sales deleverage. Moreover, non-restructuring costs associated with store asset impairments, and technology and digital initiatives in China and Japan also hurt the segment’s margin.
Comps in China declined 3%, including 7% transaction fall due to store closures and reduced traffic.
The company announced that 99% of its stores in China have resumed operations and anticipates continued improvement in traffic.
Channel Development: Net revenues in the segment declined 9% from the prior-year quarter’s figure to $464 million. The decline was primarily due to nearly 8% unfavorable impact of Global Coffee Alliance transition-related activities, which includes structural change in its single-serve business and negative impact of COVID-19 on the Foodservice business. Moreover, operating margin contracted 510 basis points to 42.7%.
The company provided fiscal 2021 guidance. Management noted that fiscal year 2021 is a 53-week year instead of the normal 52 weeks. The company anticipates global comparable sales to increase between 18% and 23% in fiscal 2021. Moreover, the company anticipates Americas and U.S. comparable store sales to increase in the range of 17% to 22% in fiscal 2021. International comps for the fiscal 2021 are expected in the range of 25% to 30%. The company anticipates China comparable store sales growth to be 27-32%.
The company expects to open nearly 2,150 (850 stores in Americas and 1,300 internationally) news stores and 1,100 (50 stores in Americas and 1,050 in internationally) net new stores worldwide in fiscal 2021. In China, the company expects to open 600 net new stores.
The company anticipates consolidated revenues in the range of $28 billion to $29 billion, inclusive of a $500 million impact attributable to the 53rd week. Channel development revenues are expected in the range of $1.4 billion to $1.6 billion. Moreover, adjusted operating margin expected between 16% and 17%.
Non-GAAP earnings for the fiscal first quarter are anticipated to be 50-55 cents. The Zacks Consensus Estimate for the fiscal first-quarter earnings is currently pegged at 61 cents. Moreover, for full-year earnings is expected in the range of $2.70 to $2.90. The Zacks Consensus Estimate for fiscal 2021 earnings currently stands at $2.72, above the mid-point of the company’s guidance range.
Other Financial Updates
The company ended the quarter with cash and cash equivalents of $4,350.9 million compared with $2,686.6 million at the end of Sep 29, 2019. As of Sep 27, 2020, long-term debt is at $14,659.6 million compared with $11,167 million as of Sep 29, 2019.
Moreover, the company declared a cash dividend increase of 10% to 45 cents per share, payable on Nov 27, to shareholders of record as of Nov 12.
Zacks Rank & Key Picks
Starbucks, which shares space with McDonald's Corporation MCD, has a Zacks Rank #3 (Hold).
Some better-ranked stocks worth considering in the same space include Brinker International, Inc. EAT and Fiesta Restaurant Group, Inc. FRGI, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Brinker has a three-five-year earnings per share growth rate of 12.7%.
Fiesta Restaurant anticipates 2021 earnings to surge 260.7%.
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