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Why Starbucks’s Earnings Margins Declined in Fiscal 2017

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Jan. 15 2018, Updated 10:32 a.m. ET

Fiscal 2017 EBIT margins

In fiscal 2017, Starbucks (SBUX) posted an EBIT (earnings before interest and tax) margin of 19.7%, compared to 19.9% in fiscal 2016. The rise in the cost of sales and store operating expenses led to a decline in Starbucks’s EBIT margins in fiscal 2017.

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Factors that affected Starbucks’s margins

In fiscal 2017, the cost of sales—including occupancy expenses—increased from 39.9% of the total revenue in fiscal 2016 to 40.4%, while store operating expenses increased from 28.4% to 29.0%. The cost of sales increased due to a product mix shift toward premium food while some of the increase was offset by sales leverage. Store operating expenses increased due to higher partner and digital investments.

However, some of the declines in EBIT margins were offset by a fall in other operating expenses, D&A (depreciation and amortization) costs, and G&A (general and administrative) expenses. The other operating expenses declined from 2.6% of the total revenue to 2.5% due to lower performance-based compensation. D&A expenses fell from 4.6% to 4.5% due to sales leverage. G&A expenses declined from 6.4% to 6.2% due to lower performance-based compensation and employment taxes.

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Peer comparisons

For the same period, McDonald’s (MCD), Dunkin’ Brands (DNKN), and Domino’s Pizza (DPZ) posted EBIT margins of 36.9%, 54.5%, and 18.3%, respectively.

Outlook

For fiscal 2018, 2019, and 2020, analysts expect Starbucks’s EBIT margin at 20.1%, 20.7%, and 21.0%, respectively. The expansion in EBIT margins is expected to be driven by sales leverage from positive same-store sales growth, the decline in G&A expenses—which are expected to grow at half the rate of revenue growth—and a lower cost of goods sold.

Next, we’ll look at Starbucks’s fiscal 2017 EPS.

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