Starbucks (SBUX) is scheduled to report results of its fiscal first quarter after the market close on Tuesday, January 28, with a conference call scheduled for 5:00 pm ET. What to watch for:
1. FY20 GUIDANCE: When Starbucks reported its fourth quarter results on October 30, 2019, it said it saw fiscal year 2020 global comparable store sales growth of 3%-4%, consolidated GAAP revenue growth of 6%-8%, and consolidated operating income growth of 8%-10%. The company added at that time that it planned to open approximately 2,000 net new Starbucks stores globally. Additionally, Starbucks said it saw higher FY20 interest cost as a result of debt issuances, but foresaw minimal impact from foreign currency in FY20. The company saw favorable coffee costs, but higher dairy costs in FY20. At that time, Starbucks said it remained "fully committed" to its long-term model of double-digit EPS growth, and that it saw sequential improvement in net new stores in FY20.
2. CHINA: Along with its Q4 report on October 30, 2019, Starbucks commented on its China expansion, saying it has made "significant strides" expanding its digital footprint in China, and that it has surpassed its goal to expand Starbucks Delivers in China. Starbucks added that its FY19 progress gave the company confidence in its growth strategies, and it was "excited" about the ability to sustain growth heading into FY20.
At an analyst event on December 3, 2019, Starbucks CFO Patrick Grismer was asked about the company's "hesitation" to guide higher for China given that comp growth there had been running at 5%-6%, to which Grismer stated: "There has been variability in the performance of our China business in the last couple of years. In the most recent two quarters, we were lapping some weaker performance, arguably. And we feel that a target of 1%-3% in the current environment is prudent for three reasons. We've highlighted before that our overall rate of comp sales growth has been impacted by three things, and that explains why we're guiding to the low single digits as opposed to what had traditionally been mid- to high-single digits. Number one is that we have picked up the pace of new unit development, and with that comes cannibalization. And we're doing that because, again, we see the significant growth potential in the market and the opportunity to capitalize on the strength of our brand position. So the first piece is we're effectively doing it to ourselves, but we're doing it intentionally in the interest of growing total transactions and total sales... Number two is that, as I mentioned before, our success has proven the attractiveness of the category and has drawn a lot of competition... and the third is in the last two to three years, the rate of economic growth in the market has slowed."
3. CORONAVIRUS: Complicating Starbucks growth strategy in China is the recent outbreak of coronavirus, which originated in Wuhan, China. On January 26, Reuters reported that Starbucks had closed all shops and suspended delivery services in China's Hubei province for the week-long Lunar New Year holiday amid the new coronavirus outbreak, with Starbucks saying the move is out of "health concerns" for its customers and employees. On January 27, Guggenheim analyst Matthew DiFrisco noted that among the restaurant stocks he covers, Starbucks has the greatest exposure to China as measured by percentage of worldwide system revenues and operating income. DiFrisco added that Starbucks had about 4,275 stores in China at the end of 2019, and he estimated China accounts for about 10% of Starbucks' sales and about 12%-15% of its operating income. DiFrisco kept a Neutral rating on Starbucks.
4. OTHER ANALYST TAKES: On January 9, Barclays analyst Jeffrey Bernstein upgraded Starbucks to Overweight from Equal Weight with a price target of $107, up from $90. The analyst said he expected a "fundamental reacceleration" into FY20 and viewed the shares as attractively valued. Starbucks offers an attractive combination of outsized global growth in both comparable sales and store units, Bernstein told investors in a research note. The analyst viewed the company's 2020 global comp sales growth target of 3%-4% given strength from its digital initiates and rewards.
On January 23, Cleveland Research analyst Steven Gojak said his industry checks led him to believe that Americas comps for Starbucks are likely running ahead of consensus expectations for Q1, driven by a combination of cold beverage strength, solid holiday promotions and rewards benefits. The outlook for the rest of FY20 remains "optimistic" based on his work, added Gojak, who kept a Neutral rating on Starbucks shares.
Also on January 23, Gordon Haskett analyst Jeff Farmer said he saw drivers in place for Starbucks to maintain both U.S. and China sales momentum. When the company reports fiscal Q1 results, the analyst is looking for earnings per share of 78c, 2c ahead of consensus, and 5% global same-store-sales, above the 4.4% Street estimate. However, Starbucks must continue to deliver on the "step-change" in SSS growth, or even see a modest acceleration, to maintain the stock's "healthy valuation premium," Farmer noted. The analyst maintained a Hold rating on the shares with a $96 price target.
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