Will Higher Costs Impact Starbucks' (SBUX) Q4 Earnings?

Starbucks Corporation (NASDAQ:SBUX) is set to report fourth-quarter fiscal 2017 results on Nov 2, after the closing bell.

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

We expect Starbucks’ revenues to rise on the back of an addition of new restaurants and positive global comparable store sales or simply comps growth. Starbucks also projected global comps at 3-4% growth for the quarter. Comps in the fiscal fourth quarter are likely to be driven by significant menu innovations like new and improved Bistro Boxes, Seared Steak and Egg Wrap.

In beverages, the launch of the Iced Cascara Coconut Milk Latte, the Iced Coconut Milk Mocha Macchiato, Nitro Freddo and the Whiskey Barrel-Aged Sulawesi cold brew are also likely to boost the company’s revenue. In its Channel Development segment, Starbucks’ introduction of Teavana Infusions, a platform of flavored food made from real fruits and botanicals is also a positive factor.

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. Addition of new restaurants, along with growth in Starbucks reward members, is expected to contribute to Starbucks’ 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 United States. Also, the Zacks Consensus Estimate for the company’s total stores of 16,510 reflects 5.8% year-over-year growth.

Segment wise: Starbucks’ Americas segment (inclusive of the United States, Canada and Latin America; comprising 70.5% of its total revenue) is expected to witness 0.6% growth in revenues, per the Zacks Consensus Estimate. China-Asia-Pacific and Channel Development segments are likely to witness 4.4% and 3.1% growth in revenues, respectively. Additionally, the consensus estimate for Europe, Middle East and Africa or EMEA segment revenues of $253 million indicates a decrease of 6.3% from the prior quarter.

Starbucks has been shifting certain EMEA markets toward a licensed model. Hence, the portfolio shifts and FX headwind are likely to leave an adverse impact on its EMEA revenues. That said, this effort has contributed to EMEA, delivering solid mid-single digit system sales growth and double-digit non-GAAP operating margins for 12 consecutive quarters.

Overall, for the fiscal fourth quarter, the Zacks Consensus Estimate for revenues stands at $5.73 billion, implying 0.4% year-over-year growth.

With respect to the company’s bottom line, Starbucks’ EPS will likely witness a decline in the third quarter due to a rise in cost of sales and higher goodwill and other asset impairment expenses for the closing of 379 Teavana stores. Hence, despite a revenue-growth expectation, the coffee giant’s margins are likely to fall due to higher cost of sales as a result of commodity inflation. However, these headwinds are likely to be offset by lower general and administrative (G&A) expenses.

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. This trend is expected to follow in the fiscal fourth quarter as well.

However, a challenging environment in the United States restaurant space might be a cause for concern for investors in the near term.

For the fiscal fourth quarter, the Zacks Consensus Estimate for earnings is pegged at 55 cents a share, reflecting a decrease of 2.5% year over year.

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 -0.08%.

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 about an earnings beat.

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.

El Pollo Loco Holdings, Inc. (NASDAQ:LOCO) has an Earnings ESP of +1.65% and a Zacks Rank #2 (Buy). The company is set to report its quarterly results on Nov 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Noodles & Company (NASDAQ:NDLS) has an Earnings ESP of +66.67% and a Zacks Rank of 3 as well. The company is set to report quarterly results on Nov 9.

DineEquity, Inc. (NYSE:DIN) has an Earnings ESP of +5.14%. The Zacks #3 Ranked company is set to report quarterly results on Nov 9.

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