Starbucks' (SBUX) Q1 Earnings Beat, Revenues Miss Estimates

Starbucks Corporation (NASDAQ:SBUX) reported mixed first-quarter fiscal 2020 results, wherein the bottom line surpassed the Zacks Consensus Estimate but the top line missed the same. Notably, revenues missed the consensus mark after beating in the trailing two quarters. Following the results, the company’s shares declined 1.8% in after-hour trading session on Jan 28.

However, the company’s both top and bottom line increased year over year. The quarterly results benefited from robust performance of Americas and international segments, store openings, enhanced customer experience, and digitalization. Meanwhile, comparable sales from China increased for the sixth straight quarter.

Discussion on Earnings, Revenues & Comps

In the quarter under review, adjusted earnings of 79 cents per share surpassed the consensus mark of 76 cents and improved 5.3% on a year-over-year basis.

Total revenues came in at $7,097.1 million, marginally missing the Zacks Consensus Estimate of $7,100 million. However, the figure improved 7% from the year-ago level. The upside can be attributed to robust global retail sales, comparable sales growth and streamline-driven activities.

Global comparable store sales increased 5% compared with 5% improvement in fourth-quarter fiscal 2019. Global comps were driven by a 3% increase in average ticket and 2% improvement in comparable transactions.

Starbucks opened 539 net new stores worldwide in the fiscal first quarter, bringing the total store count to 31,795. Global store growth came in at 6%, based on a year-over-year comparison.

Overall Margin Improves in Q1

On a non-GAAP basis, operating margin expanded 80 basis points year over year to 18.2%. The uptrend was primarily due to sales leverage and supply chain efficiencies. The increase was partially overshadowed by rise in wages and benefits. It was also negated to a lesser degree by rent inflation and investments in store labor hours. Per management, despite investing in partners, stores and digital capabilities, it has managed to deliver margin expansion.

Starbucks Corporation Price, Consensus and EPS Surprise

Segmental Performance

Notably, in fourth-quarter fiscal 2019, the company realigned its operating segments. Specifically, the China/Asia Pacific segment and Europe, Middle East and Africa segment have been combined into one International segment.

Results of Siren Retail — which is a non-reportable operating segment consisting of Starbucks ReserveTM Roastery & Tasting Rooms, Starbucks Reserve brand and Princi operations — were previously included within Corporate and Other. It will now report within Americas and International segments based on the geographical location of operations.

Americas: Net revenues at this flagship segment increased 9% year over year to $5,010.9 million, driven by 550 store openings in a year’s time and comps growth of 6% in the quarter under review.

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 and digital initiatives. Starbucks’ cold beverage platform grew across all dayparts led by cold coffee, refreshment and tea. The Nitro Cold Brew platform, which reached full penetration of its company-operated stores by the end of the fiscal fourth quarter, continued to be well received. Beverage and food contributed five points and one point to comps growth, respectively, during the quarter under review.

Operating margin in the Americas segment expanded 90 bps to 21.9% due to sales leverage, supply chain competences and lower restructuring and impairment charges.

International: Net revenues grew 4% year over year to $1,571.1 million at this segment. After adjusting for the unfavorable impact of streamline-related activities of 6%, revenues grew 10% year over year in the quarter. The upside was mainly driven by 11% store growth and comps growth of 1% in the quarter under review.

Moreover, operating margin in the segment expanded 230 bps to 17.6% on the back of sales leverage, cost-saving initiatives, labor efficiencies and the impact of conversion of certain retail businesses to fully-licensed markets.

In China, the company’s main international market, new store development continues to be the number one growth factor. Its store count increased 16% from the prior-year figure.

Comps growth was 3% in China, including 1% transaction growth, driven by strength in digital customer engagement, primarily owing to growth of delivery, the Starbucks Rewards loyalty program and MOP.

Channel Development: Net revenues at this segment decreased 2% from the prior-year quarter to $494.6 million. The downturn was due to the sale of Tazo branded products to Unilever (LON:ULVR) and transition activities related to the Global Coffee Alliance.

Nonetheless, operating margin expanded 70 bps to 35.5%, attributable to lapping prior-year Nestlé transaction costs, distribution efficiencies and favorable business mix shift.

Fiscal 2020 Guidance

The company has reiterated fiscal 2020 guidance. Starbucks continues to anticipate global comps growth in the range of 3-4%. Globally, it expects to add approximately 2,000 net new stores (600 in Americas and 1,400 in International markets). Consolidated GAAP revenue growth is projected within 6-8%.

GAAP EPS is envisioned in the band of $2.84-$2.89. Also, non-GAAP EPS is expected within $3.00-$3.05. The Zacks Consensus Estimate for fiscal 2020 earnings is currently pegged at $3.05.

Impact of Coronavirus

Starbucks business in China is likely to be impacted by the coronavirus outbreak. Per the company, fiscal 2020 guidance will be updated, once the impact of coronavirus is estimated. Notably, more than half of the company’s stores in China have been impacted by the coronavirus outbreak.

Zacks Rank & Other Key Picks

Starbucks currently has a Zacks Rank #2 (Buy). Some other top-ranked stocks in the same space include Domino's Pizza, Inc. (NYSE:DPZ) , Dunkin' Brands Group, Inc. (NASDAQ:DNKN) and Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) . All these stocks have the same rank as Starbucks.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Domino's Pizza, Dunkin' Brands and Dave & Buster's Entertainment have an impressive long-term earnings growth rate of 13.7%,10.9% and 14.8%, respectively.

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