Starbucks (SBUX) Down 7.3% Since Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Starbucks Corporation (NASDAQ:SBUX). Shares have lost about 7.3% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to its next earnings release, or is SBUX due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

First-Quarter Fiscal 2018 Results

Starbucks reported better-than-expected earnings but failed to meet the Zacks Consensus Estimate for revenues in first-quarter fiscal 2018 results. The company also lifted its full-year profit outlook considering the new U.S. corporate tax cut.

Earnings, Sales & Comps Discussion

Adjusted earnings per share (EPS) of 65 cents surpassed the Zacks Consensus Estimate of 57 cents by 14% and grew 25% year over year.

Total sales of $6.07 billion missed the Zacks Consensus Estimate of $6.14 billion by a small percentage but increased 6% from the year-ago level. Notably, Q1 revenues mark Starbucks’ first ever $6 billion quarterly revenues. The year-over-year performance was driven by higher revenues from the opening of 2,305 net new stores over the past 12 months and higher comps growth.

Global same-store sales increased 2%, same as the preceding quarter. Global traffic increased 2% in the quarter, same as the previous quarter. Transactions remain flat during the quarter against 1% growth in the preceding quarter. The company opened 700 net new stores globally, bringing the total store count to 28,039 across 76 markets.

Margins Down

Operating margin decreased 140 basis points (bps) year over year to 18.4% in the quarter due to product mix shift, largely toward food and restructuring cost associated with the company's ongoing efforts of streamlining business operations.

On a non-GAAP basis, operating margin declined 80 bps to 19.2%.

Quarterly Segment Details

Americas: Net revenues in this flagship segment were up 7% year over year to $4.3 billion. Comps rise of 2% in the quarter was softer compared with an increase of 3% in the last quarter. U.S. comps grew 2%, comprising 2% increase in average ticket.

Food comps were 2% and the company’s core beverage comp (excluding holiday limited time offerings) was 1%.

Membership increased 11% year over year in the My Starbucks Rewards (MSR) program. Customers in the United States are using the chain's mobile app to order and pay for their drinks and are joining the company's rewards program. Mobile payments represented 31% of U.S. transactions, reflecting an increase from 27% a year ago.

Operating margin in the segment, however, contracted 100 bps to 23% as strong sales leverage was more than offset by the impact of food-related mix shift.

China-Asia-Pacific (CAP): Net revenues increased 9% to $843.7 million on the back of higher revenues from new store opening and comp store sales growth.

Comps grew 1%, softer than 2% in the previous quarter. China continued to post stellar comps growth, delivering 6% in the quarter (softer than 8% in the preceding quarter). Japan’s comp growth continues to be negatively impacted by softness in limited time offerings and Frappuccino limited-time offerings, in particular.

Operating margin at the CAP segment expanded 210 bps year over year to 23.3% in the quarter, buoyed by strong sales leverage and positive currency effect.

Europe, Middle East and Africa (EMEA): Net revenues were up 8% year over year at $283.9 million in the segment, as higher revenues from addition of new stores and positive currency effect.

That said, comps declined 2% (against 1% growth in the preceding quarter).

Operating margin declined 300 bps to 13.8% due to softer performance in its company-owned stores.

Channel Development: Channel Development's net revenues improved 1% to $560.3 million. The growth was driven by its foodservice, international and packaged coffee channels.
Operating margin contracted 50 bps to 43.4%.

All-Other: The segment comprises Seattle's Best Coffee, Starbucks Reserve and Roastery businesses. Revenues at the segment decreased 22% to $120 million.

Fiscal 2018 Guidance

Starbucks now expects global comp growth at the lower end of its earlier projected guidance at 3-5%. The company still expects to add approximately 2,300 net new stores globally. Consolidated revenue growth is expected in the high single digits. The company expects revenue growth of approximately 9-11% after including approximately 4 points of favorable impact from the East China acquisition and approximately 2 points of unfavorable impact from other streamlining activities.

Consolidated operating margin is expected to decrease slightly (before additional partner and digital investments related to changes in U.S. tax law). Including these investments, operating margin is anticipated to decline moderately from the fiscal 2017 level of 19.7%.

The company expects its GAAP EPS to be in the range of $3.32-$3.36. Starbucks now expects non-GAAP EPS in the range of $2.48-$2.53 compared with $2.30-$2.33 expected earlier with growth in the second half to be a shade higher than the first half. Although the guidance is consistent with the company’s earlier projection, the raised view reflects net impact of the new U.S. tax law's federal statutory tax rate and related reinvestments.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. There has been one revision higher for the current quarter compared to one lower.

Starbucks Corporation Price and Consensus

Starbucks Corporation Price and Consensus | Starbucks Corporation Quote

VGM Scores

At this time, SBUX has an average Growth Score of C, however its Momentum is doing a lot better with an A. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than growth investors.

Outlook

SBUX has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.