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We expected more from Starbucks, but remain believers in the brand
Starbucks (SBUX) on Tuesday reported a mixed fiscal third quarter, as earnings beat expectations but a slight miss on comparable-sales growth and a small slowdown in the U.S. sent shares about 1% lower in afterhours trading. But Starbucks’ reinvention plan is only beginning to take shape, and we’re bullish long-term on a brand that remains popular — and ubiquitous — on street corners around the globe. Revenue for the three months ended July 2 rose 12% year-over-year, to $9.2 billion, missing analysts’ estimates of about $9.3 billion, according to Refinitiv. Adjusted earnings per share (EPS) increased 19% from last year, to $1, exceeding analysts’ predictions of 95 cents per share, Refinitiv estimates showed. Bottom line It wasn’t a bad quarter from Starbucks but with expectations low headed into the print, we wanted to see more. We’re encouraged by the coffee maker’s strong comparable sales internationally and its rebound in China, despite the confusing economic signals in that key market. But the slight comparable-sales miss in North America prompted questions bout the company’s ability to hit its long-term targets of 10% to 12% revenue growth and 15% to 20% earnings growth. CEO Laxman Narasimhan defended those targets on the company’s post-earnings conference call, saying the company would provide more details on how to achieve its goals when it reports fiscal fourth-quarter earnings in November. But at a high level, Narasimhan said he had confidence in Starbucks’ ability to reach its targets because of the strength of the brand, the historically high number of customers who visit its stores daily, the company’s ability to innovate across beverage and food, net store-count expansion, and productivity-driven margin expansion. Starbucks’ targets may be up for debate, making the stock somewhat of a “show-me in the short term” name for investors, but it’s worth keeping in mind that the benefits of the company’s reinvention plan are still in the early innings. For example, last fall Starbucks unveiled its new Siren System as a way to reduce the time it takes baristas to make specialty drinks. The equipment is still only in the testing phase and is expected to be operational in under 10% of stores by next year. It’s one of many equipment investments Starbucks is making to drive margin expansion in the future. With the stock down slightly after a quarter that offered nibbles for both bulls and the bears, we’ll likely wait to see if it falls further before again adding to our position . But we continue to have faith in Starbucks’ recently appointed CEO , given his breadth of experience in leading global consumer-product companies. We also remain believers in the unrivaled name recognition of the Starbucks brand, which ended the quarter with a record 90-day active-user base of 31.4 million in the U.S., up 15% from last year. Quarterly commentary Comparable-store sales in North America in the fiscal third quarter grew by 7% on an annual basis, representing a modest slowdown from the 12% growth seen in the company’s fiscal second quarter —though that still amounted to the highest average weekly sales in the company’s history. Operating margins expanded to 21.7%, from 19.1%, over the same period. In the U.S., comparable sales increased 7%, with a 6% increase in ticket, or spending on higher-priced goods, and a 1% growth in transactions. That’s also a slowdown from the fiscal second quarter, when comparable sales increased 12% with an equal increase across transactions and ticket. The international segment delivered double-digit growth across all its major markets and reported its highest revenues since the fourth quarter of fiscal year 2021. But the main focus for investors was on China, Starbucks’ biggest market after the U.S. The results in China — where the expected economic rebound has stalled — should calm some investor fears. Revenues increased 51% from last year, to $821.9 million, with comparable stores sales up 46%. Recently, there have been concerns about highly promotional competitors trying to eat into Starbucks’ market share, but the brand appears to be prevailing over would-be rivals. In addition, Starbucks continues to invest to expand its footprint in China. It opened 237 new stores since the prior quarter — up 12% from last year — bringing its total in the country to 6,480. Starbucks has a goal of reaching 9,000 stores in China by 2025. (Jim Cramer’s Charitable Trust is long SBUX. See here for a full list of the stocks.) 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WUHAN, CHINA – OCTOBER 6: (CHINA OUT) An employee services in a Starbucks coffee truck at Wuhan International Plaza on October 6, 2022 in Wuhan, Hubei province, China. China is celebrating their 73nd National Day and a week-long holiday known as the “Golden Week”. (Photo by Getty Images）
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Starbucks (SBUX) on Tuesday reported a mixed fiscal third quarter, as earnings beat expectations but a slight miss on comparable-sales growth and a small slowdown in the U.S. sent shares about 1% lower in afterhours trading. But Starbucks’ reinvention plan is only beginning to take shape, and we’re bullish long-term on a brand that remains popular — and ubiquitous — on street corners around the globe.
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