Starbucks (SBUX) To Report Q3 Earnings. What's In Store?

Starbucks Corporation (NASDAQ:SBUX) is set to report third-quarter fiscal 2016 results on Jul 21, after the closing bell. Last quarter, the company delivered in-line earnings.

Starbucks has delivered positive earnings surprise in two of the last four quarters with an average surprise of 0.60%

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

Factors to Consider

Adjusted earnings per share are expected in the range of 48–49 cents in the fiscal third quarter. The earnings guidance represents a growth rate of 14–17%.

However, management anticipates comps growth in the fiscal third quarter to be affected by the transition to the new Rewards program. In April, Starbucks updated its rewards program. According to which customers will now receive rewards for every dollar spent at its stores instead of the number of visits.

Starbucks’ second quarter fiscal 2016 results were below expectations. Its sales growth disappointed the investors due to slow down of the global traffic trends. Higher sales in China and U.S. offset a relatively softer performance in Europe.

We expect robust sales growth in the Americas to continue. The upside is expected to be driven by higher food sales and food/beverage innovation along with continued benefits from the digital initiatives. Starbucks’ latest digital offering, Mobile Order and Pay, is witnessing increasing usage and could prove to be a key growth driver in the to-be-reported quarter as well as in 2016 as its adoption increases. This initiative allows the customers to order beforehand and pick up the items at their preferred Starbucks outlet, saving time in the process.

Also, sales leverage and improved operational efficiency should support the profits in Americas which will be partially offset by accelerated global employee and digital investments.

Sales and profits should remain strong in China as well. However, we do not expect any improvement of sales trends prevailing in Europe. The strong performance witnessed in the past few quarters in the CPG segment due to higher sales of Starbucks-branded K-Cup offerings and increased foodservice and packaged coffee sales are likely to continue in the to-be-reported quarter.

Earnings Whispers

Our proven model does not conclusively show that Starbucks is likely to beat earnings this quarter. That 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. That is not the case here, as you will see below.

Zacks ESP: Starbucks’ Earnings ESP is 0.0% as the Most Accurate estimate as well as the Zacks Consensus Estimate stand at 49 cents.

Zacks Rank: Starbucks’ Zacks Rank #3 (Buy) increases the predictive power of ESP. However, we need to have a positive ESP to be confident about a positive earnings surprise.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Here are some companies in the restaurant sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Jack in the Box Inc. (NASDAQ:JACK) , with an Earnings ESP of +1.15% and a Zacks Rank #2.

Papa John's International Inc. (NASDAQ:PZZA) , with an Earnings ESP of +3.70% and a Zacks Rank #2.

Bloomin' Brands, Inc. (NASDAQ:BLMN) , with an Earnings ESP of +3.33% and a Zacks Rank #3.