Starbucks (SBUX) To Report Q1 Earnings: What's In The Cards?

Starbucks Corporation (NASDAQ:SBUX) is set to report first-quarter fiscal 2018 results on Jan 25, after the closing bell.

In the preceding quarter, the company’s earnings met the Zacks Consensus Estimate. In fact, the coffee chain giant reported in-line results on earnings in the trailing four quarters. However, the company failed to meet the consensus estimate for revenues in each of the trailing four quarters.

Nonetheless, we expect Starbucks’ earnings to increase in the to-be-reported quarter banking on higher revenues, lower tax rate and share repurchases.

Starbucks Corporation Price and EPS Surprise

Starbucks Corporation Price and EPS Surprise | Starbucks Corporation Quote

Factors at Play

The company’s top line is likely to experience a noticeable boost in the to-be-reported quarter on the back of higher revenues from new store additions, expansion in China, positive global comparable store sales or simply comps growth and higher revenues from its business segments.

In fiscal 2018, Starbucks expects to expand globally by adding 2,300 net new locations (excluding Teavana closures), marking an increase from roughly 2,250 net new locations in fiscal 2017. Overall, the Zacks Consensus Estimate for the company’s total stores of 27,821 (as of Dec 2017) reflects 8.1% year-over-year growth.

Again, in order to boost its comps growth, Starbucks is strengthening its product portfolio with significant innovation around beverages, refreshment, health and wellness, tea and core food offerings. The company holds a leading position in digital, card, loyalty and mobile capabilities. Starbucks has secured a leading position in leveraging its mobile and digital assets and loyalty and e-Commerce platforms to capitalize on these trends and create more revenue streams. Starbucks projected global comp growth at 3-5% for fiscal 2018.

The company has also been streamlining its business and directing investments toward operations where growth prospects and returns are the greatest. For this, Starbucks will acquire the remaining 50% of its East China operations, refranchise 700 company-owned restaurants in Singapore, Germany, and Taiwan, and close Teavana stores and its e-commerce platform. Although these efforts will benefit the company in the long run, it will likely impact Starbucks’ revenues in fiscal first quarter.

Overall, for the fiscal first quarter, the Zacks Consensus Estimate for revenues stands at $6.15 billion, implying 7.2% year-over-year growth.

Segment Wise: Starbucks’ Americas segment revenues (inclusive of the United States, Canada and Latin America; comprising 70% of its total revenues) is expected to witness 8.3% growth year over year and 9.4% sequentially, per the Zacks Consensus Estimate. Revenues in the China-Asia-Pacific segment are likely to witness 12.8% year over year and 1.2% growth sequentially. Channel Development is projected to report revenues of $588 million, higher than $554 million in the year-ago quarter and $515 million in the preceding one. Additionally, the consensus estimate for Europe, Middle East and Africa or EMEA segment revenues of $283 million indicates an increase from $262 million in the year-ago quarter and $270 million in the prior quarter.

Meanwhile, apart from higher revenues, lower tax rate along with share repurchases will help Starbucks to post higher earnings. Starbucks expects effective tax rate for 2018 to be approximately 27%, including approximately 6 points of favorable impact from the planned acquisition of East China. The effective tax rate for fiscal 2017 was 33.2%.

Again, the company has 80.3 million of shares remaining authorized for repurchase, as of Oct 1, 2017, under its ongoing share repurchase program. Hence, share repurchases will help earnings per share to grow more each quarter. However, these positives are likely to be partly offset by lower margins owing to the costs associated with restructuring its operation. Overall, for the fiscal first quarter, the Zacks Consensus Estimate for earnings is pegged at 57 cents, reflecting a 9.6% year-over-year increase.

All these positive factors have aided the company to post higher earnings despite the tepid comps and are also reflected in the price movement of the company. Shares of the company have rallied almost 13%, outperforming the broader industry’s growth of 9.2% in the last three months.




Quantitative Model Prediction

Here is what our quantitative model predicts:

Starbucks does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: Starbucks has an Earnings ESP of -0.24%.

Zacks Rank: Starbucks carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks Worth a Look

Here are a few restaurant stocks worth considering as these have the right combination of elements to beat estimates this quarter.

Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) has an Earnings ESP of +1.03% and a Zacks Rank #2 (Buy). The company is expected to report quarterly results on Feb 20.

Potbelly Corporation (NASDAQ:PBPB) has an Earnings ESP of +7.14% and a Zacks Rank of 3 as well. The company is expected to report quarterly results on Feb 13.

Restaurant Brands International Inc. (NYSE:QSR) has an Earnings ESP of +1.45%. The Zacks #3 Ranked company is expected to report quarterly results on Feb 12.

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