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Starbucks (SBUX) Reports In-Line Q4 Earnings, Lowers Targets

Starbucks Corporation SBUX reported in-line earnings but failed to meet the Zacks Consensus Estimate for revenues in fourth-quarter fiscal 2017 results.

Apart from the earnings release, Starbucks made other major announcements. First, Starbucks lowered long-term financial targets, cutting the annual earnings growth forecast to 12% versus the prior guidance for 15%-20%. The company expects global same-store sales or comps of 3-5% and high single-digit net revenue growth (versus prior expectation of 10% or greater).

Second, the premium coffee giant has entered into an agreement to sell Tazo tea to Unilever for $384 million. The deal includes the Tazo brand, signature recipes, intellectual property and inventory and allows Starbucks to focus its tea strategy on Teavana.

Starbucks shares dipped more than 3% following the news release on Nov 2, possibly in response to the lowered long-term targets and weak fourth-quarter results.

Earnings, Sales & Comps Discussion

Adjusted earnings per share (EPS) of 55 cents came in line with the Zacks Consensus Estimate, but grew 10% year over year.

Total fourth-quarter sales of $5.7 billion missed the Zacks Consensus Estimate of $5.73 billion by 0.6% and remained unchanged from the year-ago level. The underperformance was due to the impact of hurricanes Irma and Harvey, which affected the company’s overall top line as well as U.S. comp growth by 1%. This was because more than 1,000 stores had to be temporarily closed due to storm-related reasons.

Global same-store sales increased 2%, lower than 4% growth in the preceding quarter. Global traffic increased 2% in the quarter compared with 4% in the previous quarter. Transactions increased 1%.

Margin Down

Operating margin decreased 360 basis points (bps) year over year to 17.9% in the quarter due to higher partner investments, primarily in the Americas segment, and the lapping of the 53rd week in the year ago quarter. Again, product mix shift, largely towards food, a higher donation to The Starbucks Foundation, and restructuring and impairments cost added to the woes.

On a non-GAAP basis, operating margin declined 90 bps to 20%.

Quarterly Segment Details

Americas: Net revenues in this flagship segment were down 0.5% year over year to $3.9 billion.

Comps rise of 3% in the quarter was softer compared with an increase of 5% in the last quarter. U.S. comps grew 2%, comprising 1% increase in average ticket.

The company's core espresso, tea and refreshment beverages contributed 2% to comps growth in the U.S. Food sales contributed 2%.

Membership increased 11% year over year in the My Starbucks Rewards (MSR) program. Customers in the U.S. are using the chain's mobile app to order and pay for their drinks and are joining the company's rewards program. Mobile payments represented 30% of U.S. transactions, reflecting an increase of from 25% a year ago.

Operating margin in the segment, however, contracted 390 bps to 24% as strong sales leverage was more than offset by hurricanes, higher investments in store partners and the impact of product sales mix.

China-Asia-Pacific (CAP): Net revenues increased 2.5% to $859.9 million on the back of higher revenues from new store opening and comp store sales growth.

Comps grew 2%, higher than 1% in the previous quarter. China continued to post stellar comps growth delivering 8% in the quarter, its strongest in nine quarters. Japan’s comp growth improved sequentially. Store and market profitability in Japan were robust, with comp growth in core food, tea, and espresso categories.

Starbucks' licensed joint venture markets, including East China and South Korea, continue to contribute to CAP's performance in the quarter. Again, South Korea marks its fifth-largest global market, with system sales exceeding $1 billion in fiscal 2017, with double-digit comp growth in the year, underscoring the broad success Starbucks is having across the region.

Operating margin at the CAP segment expanded 60 bps year over year to 23.5% in the quarter buoyed by strong sales leverage and higher JV income. These are partly offset by an extra week in the fourth quarter of fiscal 2016.

Europe, Middle East and Africa (EMEA): Net revenues were down 0.1% year over year at $269.9 million in the segment as higher revenues from addition of new stores were offset by an extra week in the year-ago period.

That said, comps grew 1% (against 2% growth in the preceding quarter).

Operating margin declined 330 bps to 12.9% due to softer performance in its company-owned markets and a 210-basis-point impact from a tax settlement in the quarter.

Channel Development (CPG): This segment includes roasted whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages (like Frappuccino and Starbucks Refreshers) and Starbucks and Tazo-branded K-Cup packs sold through channels such as grocery, specialty retailers, and foodservice, to name a few.

Channel Development's net revenues declined 0.7% to $514.9 million.

Operating margin expanded 80 bps to 47.9%.

All-Other: The segment comprises emerging brands like Teavana (acquired in Dec 2012), Seattle's Best Coffee, Starbucks Reserve and Roastery businesses. Revenues at the segment decreased 9.2% to $104.6 million.

Fiscal 2017 Highlights

The company’s non-GAAP earnings came in at $2.06 per share, increasing 11.4% year over year. Net revenues were $22.4 billion, up 5% on 3% global comps growth.

The company’s non-GAAP operating income increased 7.8% to $4.4 billion in the year and corresponding margin expanded 10 bps.

Fiscal 2018 Guidance

Starbucks projected global comp growth at 3-5% based on the addition of approximately 2,300 net new stores globally.

Consolidated operating margin is likely to be slightly up, excluding the impact of the change in ownership structure in East China on operating margin.

The company expects its GAAP EPS to grow more than 40%.

Starbucks expects non-GAAP EPS growth of 12-13%, or $2.30-$2.33 per share in fiscal 2018 with growth in the second half to be a shade higher than the first half.

Zacks Rank

Starbucks carries a Zacks Rank #3 (Hold). You can see see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Peer Releases

Yum! Brands, Inc. YUM posted better-than-expected third-quarter 2017 results with both earnings and revenues surpassing the Zacks Consensus Estimate.

McDonald's Corp. MCD reported third-quarter adjusted earnings per share of $1.76, beating the Zacks Consensus Estimate of $1.75 by 0.6%. Earnings also increased 9% year over year, given stronger operating performance and G&A savings.

Darden Restaurants, Inc.’s DRI first-quarter fiscal 2018 adjusted earnings of 99 cents per share outpaced the Zacks Consensus Estimate of 98 cents by more than 1%. Further, the bottom line increased 12.5% year over year on the back of higher revenues.

Starbucks Corporation Price, Consensus and EPS Surprise


Starbucks Corporation Price, Consensus and EPS Surprise | Starbucks Corporation Quote

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