Starbucks (SBUX) To Report Q3 Earnings: Will It Disappoint?

Starbucks Corporation (NASDAQ:SBUX) is set to report third-quarter fiscal 2017 results on Jul 27, after the closing bell.

The coffee chain giant’s earnings were in line with the analysts’ expectations in the last reported quarter. Starbucks met expectation in three of the trailing four quarters and delivered a positive earnings surprise in the quarter ending Sep 2016, with an average beat of 0.46%.

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

Starbucks’s operating fundamentals remain strong with solid global retail footprint, successful innovations, best-in-class loyalty program and digital offerings. Particularly, Starbucks is strengthening its portfolio with significant innovation in beverages and core food offerings.

We expect Starbucks’ global comparable store sales or simply comps in the fiscal third quarter to be driven by significant menu innovations like introduction of a new fresh food concept, Mercato, in Chicago in April. The launch of the Midnight Mint Mocha Frappuccino, Emerald City Mule, Unicorn Frappuccino, and Cascara Lemon Sour is also likely to boost its revenue.

Starbucks’ digital offering, Mobile Order and Pay, is also witnessing increased usage and could prove to be a key growth driver in the to-be-reported quarter as well as in 2017. Again, Starbucks introduced a new digital order manager or DOM in order to reduce traffic congestion during peak time. Addition of new restaurants, along with growth in Starbucks reward members, is expected to contribute to Starbucks’s revenue growth in the to-be-reported quarter. The company had earlier revealed that it expects stronger revenue growth in the second half of the fiscal year, driven by mid-single digit comps including accelerating comps in the U.S.

The company remains focused on growing total G&A below the rate of revenue growth and core G&A at half the rate of revenue growth in the long run. In the last reported quarter, Starbucks had already achieved both targets. The trend is expected to follow in the fiscal third quarter as well.

However, a challenging environment in the U.S. restaurant space might be a cause of worry for investors in the near term.

That said, sales leverage from positive comps growth, with lower selling, general, and administrative (SG&A) and depreciation and amortization (D&A) expenses, is expected to boost Starbucks’s operating margins, thereby driving EPS growth.

For the third quarter, the Zacks Consensus Estimate for earnings is pegged at 55 cents a share, reflecting an increase of 12.2% year over year, while the consensus for revenues stands at $5.74 billion, implying 9.7% year-over-year growth.

Earnings Whispers

Our proven model does not conclusively show that Starbucks is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -1.82%. This is because the Most Accurate estimate is 54 cents, while the Zacks Consensus Estimate is pegged at 55 cents.

Zacks Rank: Starbucks currently carries a Zacks Rank #3. Although a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Starbucks Corporation Price and EPS Surprise

Starbucks Corporation Price and EPS Surprise | Starbucks Corporation Quote

Stocks to Consider

Here are a few companies you may want to consider from the Retail-Wholesale sector, as our model shows that they have the right combination of elements to post an earnings beat this quarter.

Tempur Sealy International, Inc. (NYSE:TPX) has an Earnings ESP of +2.50% and a Zacks Rank #3. The company is scheduled to release its quarterly results on Jul 27.

Texas Roadhouse, Inc. (NASDAQ:TXRH) has an Earnings ESP of +1.89% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is slated to release its quarterly results on Jul 31.

YUM! Brands, Inc. (NYSE:YUM) has an Earnings ESP of +1.64% and a Zacks Rank #2.

The company is slated to release its quarterly results on Aug 3.

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