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Why Is Starbucks (SBUX) Down 1.2% Since Last Earnings Report?

It has been about a month since the last earnings report for Starbucks (SBUX). Shares have lost about 1.2% in that time frame, outperforming 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 Surpass Estimates, FY19 EPS View Up

Starbucks reported mixed results for the second quarter of fiscal 2019, wherein earnings surpassed the Zacks Consensus Estimate but revenues lagged the same.

Quarterly results benefited from robust performance by the Americas and China-Asia-Pacific segments, and store openings. Ownership change in the East China business and robust performance during the holiday season too aided the company’s quarterly performance. Meanwhile, comparable sales from China increased for the third straight quarter.

Earnings, Revenue & Comps Discussion

Adjusted earnings of 60 cents per share surpassed the Zacks Consensus Estimate of 56 cents and grew 13% on a year-over-year basis.

Total revenues were $6.3 billion, which slightly lagged the consensus estimate but increased 5% from the year-ago level. The upside was driven by robust new store performance, comparable sales growth, consolidation of the company’s East China business and streamline-driven activities.

Global comparable store sales increased 3%, whereas it improved4% in the first quarter of fiscal 2019. Global comps were driven by a 3% increase in average ticket.

In the quarter under review, Starbucks opened 319 net new stores worldwide, bringing the total store count to 30,184. Global store growth came in at 7%, based on a year-over-year comparison. The company stated that 94% of net new store openings were outside the United States while 88% were licensed.

Overall Margin Contraction Continues

On a non-GAAP basis, operating margin contracted 40 basis points (bps) year over year to 15.8%. The contraction was largely due to the company’s licensing of the Channel Development business. Streamline activities also had an unfavorable impact of 80 bps on consolidated margins. Excluding the negative impacts, non-GAAP operating margin expanded by approximately 40 bps, owing to the company’s cost-saving initiatives, sales leverage and new revenue recognition accounting, partially offset by partnership investments, technological enhancement and retail.

Segmental Performance

Americas: Net revenues at this flagship segment increased 8% year over year to $4.3 billion, driven by 686 store openings in the quarter and comps growth of 4%.

Markedly, segmental growth was driven by robust performance of beverage — the company’s highest margin category. Growth was also favored by an improved in-store experience. Beverage innovation and particularly Starbucks’ cold beverage platform contributed to comps growth in the quarter.

Also, operating margin in the Americas segment expanded 80 bps to 20.9%, owing to sales leverage, cost-saving initiatives and new revenue recognition accounting, partially offset by partnership investments.

China-Asia-Pacific (CAP): At this segment, net revenues were up 9% to $1.3 billion. This upside can be attributed to increased sales from ownership change in East China, 998 store openings over the past 12 months and 2% improvement in comparable store sales.

In the CAP segment, the company’s performance in China and Japan was remarkable in the quarter. In China, store count increased 17% year over year. China and Japan recorded comps growth of 3% each, driven by successful LTO performance in blended and espresso beverages as well as continued growth of Starbucks Rewards program in Japan.

Meanwhile, operating margin increased 60 bps year over year to 23.3% in the quarter, owing to sales leverage and cost savings.

Europe, Middle East and Africa (EMEA): Net revenues dropped 9% year over year to $227.5 million at this segment. This downside can be attributed to foreign currency headwinds, which overshadowed higher sales from the addition of 307 stores in the past 12 months and comps growth.

That said, comps increased 2% year over year (against 1% decline in the preceding quarter). Also, operating margin expanded 310 bps, primarily owing to a shift toward more licensed stores and closure of certain company-operated stores.

Channel Development: Net revenues at this segment decreased 21% to $446.6 million. The downturn was due to licensing of the company’s CPG as well as foodservice businesses to Nestlé, following completion of the deal on Aug 26, 2018.Moreover, operating margin contracted 820 bps to 33.4%.

Fiscal 2019 Guidance

The company anticipates global comps growth of 3-4%, slightly lower than previously mentioned 3-5%. Globally, it still expects to add approximately 2,100 net new stores. Consolidated GAAP revenue growth is still projected to be 5-7%.

GAAP EPS is envisioned to be $2.40 to $2.44, up from $2.32-$2.37 stated earlier. Also, non-GAAP EPS is expected to be $2.75 to $2.79, up from $2.68-$2.73 mentioned earlier.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Starbucks has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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 this revision indicates a downward shift. 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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