Starbucks (SBUX) to Report Q2 Earnings: What's in Store?
Starbucks Corporation SBUX is set to report second-quarter fiscal 2018 results on Apr 26, after the closing bell.
In the preceding quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 14.04%. However, the coffee-chain giant reported in-line results on earnings in three of the trailing four quarters, resulting in a positive surprise of 3.51%. Nonetheless, we expect Starbucks’ earnings to increase in the to-be-reported quarter banking on higher revenues, lower tax rate and share repurchases.
A Look at Starbucks’ Top-Line Scenario
For the fiscal second quarter, the Zacks Consensus Estimate for revenues stands at $5.91 billion, implying 11.5% year-over-year growth. Starbucks’ top line is likely to witness a noticeable boost in the to-be-reported quarter on the back of higher revenues from new store additions, expansion in China, positive global comparable store sales or simply comps growth and higher revenues from business segments.
That said, the company is expected to experience softer comps growth in Q2, given multiple challenges. Last quarter, the company’s global comps increased 2% (same as the preceding quarter) as limited-time holiday beverages, holiday gift-cards and holiday merchandise available for purchase in its stores' lobby underperformed in the quarter.
Addition of Stores, Innovations & Digital Push: The company opened 700 net new stores globally last quarter, bringing the total store count to 28,039 across 76 markets. Of the total count, 14,999 units are company owned and 13,040 franchised. If we compare with the second quarter of fiscal 2018 figure, the company operated 1,987 more company-owned restaurants at the end of first-quarter fiscal 2018. However, the upside will be partly offset by the company’s lesser number of franchised units.
In fiscal 2018, Starbucks expects to expand globally by adding 2,300 net new locations (excluding Teavana closures), marking an increase from roughly 2,250 net new locations in fiscal 2017. Overall, the Zacks Consensus Estimate for the company’s total stores of 28,384 (as of Apr 2018) reflects 8.5% year-over-year growth.
Again, in order to boost its comps growth, Starbucks is strengthening its product portfolio with significant innovation in beverages, refreshment, health and wellness, tea and core food offerings. The company holds a leading position in digital, card, loyalty and mobile capabilities. Starbucks has secured a leading position to leverage its mobile and digital assets, and loyalty and e-Commerce platforms, to capitalize on these trends and create more revenue streams. Starbucks expects global comps growth at the lower end of the guided range of 3-5% for fiscal 2018.
Addition of East China Business: China has been Starbucks' fastest-growing market. To enhance its footprint in the country, Starbucks acquired the remaining 50% of its East China operations last December from long-term joint venture partners, Uni-President Enterprises and President Chain Store Corporation. With the closure of the deal, Starbucks assumed 100% ownership of more than 1,400 restaurants in Shanghai and the Jiangsu and Zhejiang Provinces, bringing the total to more than 3,100 corporate stores in China at the time of closing.
The East China business will be fully consolidated and reflected in its financial statements beginning with the fiscal second quarter. The company expects the transaction to be neutral to slightly accretive to earnings in 2018, with a more positive impact in 2019.
Other Factors That Might Influence Q2 Earnings:
Apart from higher revenues, lower tax rate along with share repurchases will help Starbucks to post higher earnings. Starbucks expects its non-GAAP effective tax rate for 2018 to be approximately 26%. The effective tax rate in fiscal 2017 was 33.2%.
Again, the company has 52 million of shares remaining authorized for repurchase, as of Dec 31, 2017, under its ongoing share repurchase program. Hence, share repurchases will help earnings per share to grow more each quarter. However, these positives are likely to be partly offset by lower margins, owing to the costs associated with restructuring its operation. Overall, for the fiscal second quarter, the Zacks Consensus Estimate for earnings is pegged at 53 cents, reflecting a 17.8% year-over-year increase.
All these positive factors have aided the company to post higher earnings despite tepid comps and are also reflected in the price movement of the company. Shares of the company have rallied more than 7.4%, outperforming the industry’s growth of 3.5% in the last six months.
Quantitative Model Prediction
Here is what our quantitative model predicts:
Starbucks does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks ESP: Starbucks has an Earnings ESP of -0.09%.
Zacks Rank: Starbucks carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Starbucks Corporation Price and EPS Surprise
Starbucks Corporation Price and EPS Surprise | Starbucks Corporation Quote
Stocks Worth a Look
Here are some restaurant stocks worth considering as these have the right combination of elements to beat estimates this quarter.
Domino's Pizza, Inc. DPZ has an Earnings ESP of +0.20% and a Zacks Rank #3. The company is slated to report quarterly results on Apr 26.
The Habit Restaurants, Inc. HABT has an Earnings ESP of +20.00% and a Zacks Rank of 3 as well. The company is scheduled to report quarterly results on May 2.
The Wendy's Company WEN has an Earnings ESP of +2.72%. The Zacks #3 Ranked company is slated to report quarterly results on May 8.
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