Why Is Starbucks (SBUX) Down 6.6% Since Last Earnings Report?
It has been about a month since the last earnings report for Starbucks (SBUX). Shares have lost about 6.6% 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 drivers.
Starbucks Q2 Earnings Miss, Revenues Top
Starbucks 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.
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.
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.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
The consensus estimate has shifted -19% due to these changes.
VGM Scores
Currently, Starbucks has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.
Performance of an Industry Player
Starbucks is part of the Zacks Retail - Restaurants industry. Over the past month, Domino's Pizza (DPZ), a stock from the same industry, has gained 2.2%. The company reported its results for the quarter ended March 2022 more than a month ago.
Domino's Pizza reported revenues of $1.01 billion in the last reported quarter, representing a year-over-year change of +2.8%. EPS of $2.50 for the same period compares with $3 a year ago.
For the current quarter, Domino's Pizza is expected to post earnings of $2.88 per share, indicating a change of -7.7% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #5 (Strong Sell) for Domino's Pizza. Also, the stock has a VGM Score of C.
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