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Why Is Starbucks (SBUX) Down 5.6% Since Last Earnings Report?

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A month has gone by since the last earnings report for Starbucks (SBUX). Shares have lost about 5.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Starbucks due for a breakout? 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 catalysts.

Starbucks Q3 Earnings & Revenues Beat

Starbucks reported solid third-quarter fiscal 2021 results, wherein both earnings and revenues not only beat the Zacks Consensus Estimate but also improved year over year. While the bottom line surpassed the Zacks Consensus Estimate for the seventh straight quarter, the top line beat the consensus mark after missing in the preceding quarter.

Discussion on Earnings, Revenues & Comps

In the quarter under review, the company reported adjusted earnings per share of $1.01, which beat the Zacks Consensus Estimate of 77 cents by 31.2%. In the prior-year quarter, the company had reported adjusted loss per share of 46 cents.

Total revenues were $7,496.5 million, which surpassed the Zacks Consensus Estimate of $7,243 million by 3.6%. The top line increased 77.6% from the year-ago quarter. The upside was primarily driven by growth in comparable store sales. In the year-ago quarter, sales were negatively impacted by the coronavirus pandemic.

Global comparable store sales surged 73% year over year. Global comps increased owing to 75% increase in comparable transactions, partially offset by 1% decline in average ticket.

Starbucks opened 352 net new stores worldwide in the fiscal third quarter, bringing the total store count to 33,295. Global store growth came in at 3% on a year-over-year basis.

Overall Margin Expands in Q3

On a non-GAAP basis, operating margin was 20.5% versus (12.6%) in the prior-year quarter. The uptrend can be attributed to sales leverage from business recovery and the lapping of COVID-19 related costs in the prior year. However, this was partially offset by investments in store partner related wages and benefits.

Segmental Performance

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

Americas: The flagship segment’s net revenues were $5,400.3 million, up 92% year over year. The segment benefited from 84% growth in comparable store sales.

Operating margin in the Americas segment expanded to 24.4%, against (14.4%) reported in the prior-year quarter. The uptrend was driven by lapping of COVID-19 related costs in the prior year, sales leverage from business recovery and pricing, temporary government subsidies and the benefits of Trade Area Transformation. This was partly negated by investments in store partner related benefits and wages.

International: Net revenues rose 75% year over year to $1,658.4 million in the segment, courtesy of 1,175 net new store openings in the past 12 months and 10% favorable impact from foreign currency translation. International comparable store sales rose 41% year over year.

Operating margin in the segment expanded 2,830 bps year over year to 19.2%. The upside can be attributed to sales leverage owing to lapping the severe impact of the COVID-19 pandemic.

Comps in China improved 19% year over year, driven by 30% increase in transactions. The gain was partially offset by a 9% decline in average ticket.

Channel Development: Net revenues in the segment declined 7% from the prior-year quarter’s figure to $414 million. The downside was primarily due to nearly 20% unfavorable impact of Global Coffee Alliance transition-related activities and increase in product sales, and royalties in the Global Coffee Alliance. This was somewhat mitigated by growth in its ready-to-drink business. Meanwhile, operating margin expanded 2,440 bps year over year to 52.2%.

Q4 Guidance

The company anticipates global comparable store sales growth in the range of 18% to 21%. Americas and U.S. comparable store sales are expected to witness growth in the band of 22% to 25%. International comparable store sales growth is expected in the range of mid-to-high-single digits, while China comparable store are anticipated to be flat.

2021 Guidance

The company updated fiscal 2021 GAAP earnings guidance. Management noted that fiscal year 2021 is a 53-week year instead of the normal 52 weeks. The company now anticipates global comparable sales to increase between 20% and 21% in fiscal 2021, compared with prior estimate of 18% and 23%. It now expects Americas and U.S. comparable store sales to improve in the range of 21-22% in fiscal 2021, compared with prior estimate of 17-22%. International comps for the fiscal 2021 are expected in the band of 15-17%, down from the earlier estimate of 25-30%. The company anticipates China comparable store sales growth to be 18-20%, down from the prior estimate of 27% to 32%.

It continues to expect to open nearly 2,150 (850 stores in Americas and 1,300 internationally) new stores and 1,100 (50 stores in Americas and 1,050 in internationally) net new stores worldwide in fiscal 2021. In China, the company anticipates to open 600 net new stores.

Starbucks projects consolidated revenues in the range of $29.1-$29.3 billion, inclusive of a $500-million impact attributable to the 53rd week, compared with prior estimate of $28.5-$29.3 billion. Channel development revenues are expected to be $1.5-$1.6 billion, up from the earlier estimate of $1.4-$1.6 billion.

Moreover, for full-year adjusted earnings is expected in the range of $3.20-$3.25 compared with the prior estimate of $2.90-$3.00. The Zacks Consensus Estimate for fiscal 2021 earnings is currently pegged at $2.98.

Other Financial Updates

The company ended the quarter with cash and cash equivalents of $4,753.1 million compared with $4,350.9 million at the end of Sep 27, 2020. As of Jun 27, 2020, long-term debt is at $13,619.2 million compared with $14,659.6 million as of Sep 27, 2020.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

Currently, Starbucks has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Starbucks has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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