What’s Behind the Decline in Starbucks Stock Price

After posting its fiscal 2Q17 earnings on April 27, 2017, Starbucks (SBUX) stock rose 5.3% to reach $64.57 on June 2, 2017. The aggressive expansion plans in the CAP (China and Asia-Pacific) region and its implementation of technological advancements led Starbucks stock price to rise. However, since then, the stock has seen downward momentum.

As of July 3, 2017, Starbucks (SBUX) was trading at $58.25, which represents a fall of 9.8% from June 2, 2017. Skepticism about the company’s aggressive expansion plans in China and Wedbush Securities’ downgrade of the stock on June 14, 2017, from “outperform” to “neutral” could have made investors skeptical about Starbucks’ future earnings.

In fiscal 2Q17, the company posted adjusted EPS (earnings per share) of $0.45 on revenues of $5.3 billion. Analysts were expecting the company to post EPS of $0.45 on revenues of $5.4 billion. Also, the company posted global SSSG of 3.0%, which was lower than analysts’ estimate of 3.7%. After weak fiscal 2Q17 SSSG, the company management lowered its 2017 EPS guidance to be in the range of $2.08–$2.12 from an earlier estimate of $2.12–$2.14. You can read more about Starbucks’s fiscal 2Q17 performance at Starbucks Lowered EPS Guidance after Soft Fiscal 2Q17 Sales.

Since the beginning of 2017, Starbucks stock has returned 4.9%. During the same period, Dunkin’ Brands (DNKN), McDonald’s (MCD), and Domino’s Pizza (DPZ) have returned 5.7%, 25.3%, and 31.8%, respectively.

The S&P 500 Index and the Consumer Discretionary Select Sector SPDR Fund have returned 8.5% and 10%, respectively, year-to-date.

In this series, we’ll look at analysts’ revenue and EPS estimates for Starbucks for the next four quarters. We’ll also cover management guidance for fiscal 2017. We’ll wrap this series up by looking at Starbucks’s valuation multiple and analysts’ recommendations.

First, let’s look at analysts’ revenue estimates for Starbucks.

In the next four quarters, analysts are expecting Starbucks (SBUX) to post revenue of $23.8 billion, which represents an increase of 8.4% from $22.0 billion in the corresponding quarters of the previous year.

Analysts are expecting revenue growth to be driven by the addition of new restaurants, positive same-store sales growth (or SSSG), and growth in CPG (consumer packaged goods) sales. In the last two quarters of fiscal 2017, the company management expects to open 1,000 restaurants with 50% of them in the CAP region.

Analysts expect the implementation of technological advancements, menu innovations, and growth in Starbucks Rewards members to drive the company’s SSSG during the next four quarters. The company introduced Midnight Mint Mocha Frappuccino, Emerald City Mule, the Unicorn Frappuccino, and Cascara Lemon Sour in fiscal 3Q17. With the intention of doubling its food business by the end of 2021, Starbucks introduced Mercato, a new food menu item, in Chicago in April 2017. The menu item was well received, which compelled the company to expand it to other markets also.

To overcome the congestion created from mobile orders and pay customers, Starbucks’s management has implemented a new digital ordering system (or DOM), which lowers the waiting period for customers.

Moving to CPG sales, Starbucks’s core Doubleshot and Frappuccino beverages are expected to drive its NACP partnership’s sales. The growth in distribution of Starbucks Nespresso-compatible capsules in the U.K. and France are expected to drive the company’s revenue from international markets. Also, the company has started shipping Teavana ready-to-drink teas from February 2017 through its partnership with Anheuser-Busch InBev (BUD).

During the same period, Dunkin’ Brands (DNKN) and Domino’s Pizza (DPZ) are expected to post revenue growth of 2.5% and 10.1%, respectively, while the revenue of McDonald’s (MCD) is expected to fall 11.9%.

Next, we’ll look at Starbucks’s earnings estimates for the next four quarters.

Analysts are expecting Starbucks (SBUX) to post EPS (earnings per share) of $2.25 in the next four quarters, which represents an increase of 11.4% from $2.02 in the corresponding quarters of the previous year. The company’s management has lowered its 2017 EPS guidance from $2.12–$2.14 to $2.08–$2.12 due to the negative impact from underperforming Teavana sales.

Revenue growth, expansion of EBIT (earnings before interest and tax) margins, and share repurchases are expected to drive Starbucks’s EPS. Analysts expect Starbucks’s EBIT margins to expand from 19.9% to 20.7%. The sales leverage from positive same-store sales growth, lower commodity prices, and lower G&A expenses are expected to drive Starbucks’s margins. However, the rise in labor costs is expected to offset some of the expansion in margins.

In the last 12 months, the company has repurchased 18.7 million shares. By the end of fiscal 2Q17, the company was authorized to repurchase 99.0 million shares. Share repurchases reduce the number of shares outstanding, thus boosting the company’s EPS.

Analysts expect Starbucks to pay dividends of $0.25 in fiscal 3Q17 and $0.27 in fiscal 4Q17 to take the total for fiscal 2017 to $1.02, which represents growth of 20% from $0.85 in fiscal 2016.

For the next four quarters, analysts are expecting Dunkin’ Brands (DNKN), Domino’s Pizza (DPZ), and McDonald’s (MCD) to post EPS growth of 5.7%, 20.3%, and 8.4%, respectively.

Next, we’ll look at Starbucks’s valuation multiples.

Due to the high visibility in Starbucks’s (SBUX) earnings, we have considered the forward PE (price-to-earnings) multiple for our analysis. The forward PE multiple is calculated by dividing Starbucks’s stock price by analysts’ earnings estimate for the next four quarters.

Wedbush Securities’ downgrade of Starbucks stock and investor skepticism about the company’s aggressive expansion plans in China have led Starbucks stock price to fall, which in turn has brought its valuation multiple down. As of July 3, 2017, Starbucks was trading at a forward PE multiple of 24.9x compared to 27.9x on June 2, 2017.

From the above graph, we can see that Starbucks has been trading above its peers’ median value. The aggressive expansion plan and greater same-store sales growth (or SSSG) have allowed the company to trade at higher valuation multiples than peers’ median value. On July 3, 2017, peers Dunkin’ Brands (DNKN), McDonald’s (MCD), and Domino’s Pizza (DPZ) were trading at forward PE multiples of 21.8x, 23.0x, and 35.5x, respectively.

To overcome the problem of congestion at its restaurants and to reduce the waiting period for its customers, Starbucks has implemented a new digital ordering system (or DOM). The company is also focusing on raising its revenue from its Channel Development segment through Teavana ready-to-drink teas. In February 2017, the company introduced four Teavana flavors. All these initiatives have increased the company’s expenditures. If these initiatives fail to generate expected sales, the increased expenses could put pressure on the company’s margins, thus lowering its earnings.

For the next four quarters, analysts are expecting Starbucks’s earnings to rise 11.4%, which has already been factored into the company’s stock price. If the company posts earnings lower than analysts’ estimates, the selling pressure could lower the company’s stock price and its valuation multiple.

You can mitigate these company-specific risks by investing in the SPDR Dow Jones Industrial Average ETF (DIA), which has invested 43.6% of its holdings in restaurants and travel companies.

Next, we’ll look at analysts’ recommendations and their target price.

As of June 3, 2017, Starbucks (SBUX) was trading at $58.25. The stock price might have incorporated various estimates that we discussed in our earlier articles. In this article, we’ll look at analysts’ target and their recommendations.

Although the stock price of Starbucks has fallen since the announcement of its 1Q17 earnings, analysts have raised their target price from $64.50 to $66.5. The initiatives the company’s management has taken to reduce congestion and to expand revenue from channel development could have compelled analysts to raise their price target. The new target price represents a potential return of 14.3%.

The target prices and returns for Starbucks’s peers are as follows:

• Dunkin’ Brands (DNKN) has a target price of $55.95 with a return potential of 1%.
• Domino’s Pizza (DPZ) has a target price of $205.69, which represents a fall of 2.0% from its current stock price.
• McDonald’s (MCD) has a target price of $158.60 with a return potential of 4.0%.

Of the 34 analysts that follow Starbucks, 82.4% are recommending a “buy,” and 17.6% are recommending a “hold.” None of the analysts are recommending a “sell.” On June 23, 2017, KeyBanc Capital Markets upgraded the stock to “overweight” and set the 12-month target price at $68.0. Earlier on June 14, 2017, Wedbush Securities downgraded the stock from “outperform” to “neutral,” but retained the target price at $65.0. Wedbush stated that Starbucks’s stock was fairly priced and expected the company to post same-store sales growth lower than analysts’ expectations in fiscal 3Q17.

A target price higher than the company’s current stock price doesn’t mean an automatic “buy.” Investors should carefully analyze various parameters discussed in our earlier articles before making any investment decisions.