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Why Starbucks’s Fiscal 2Q18 Earnings Failed to Impress Investors

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Apr. 27 2018, Published 12:11 p.m. ET

Stock performance

Starbucks (SBUX) posted its fiscal 2Q18 earnings after the market closed on April 26. The company’s adjusted EPS (earnings per share) of $0.53 was in line with analysts’ expectations, while its revenue of $6.03 billion outperformed analysts’ estimate of $5.9 billion. Also, the company outperformed analysts’ SSSG (same-store sales growth) estimate of 1.8% in the US with SSSG of 2.0%.

Despite outperforming analysts’ sales expectations, Starbucks stock was trading 2.2% lower in the after-market hours. The slowing SSSG in the US and declining operating margins appear to have made investors skeptical about Starbucks’s future earnings.

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Revenue growth

Year-over-year, Starbucks’s revenue has risen 13.9%. The revenue growth was driven by positive SSSG and the addition of new restaurants in the last four quarters. Its segments saw the following revenue growth:

  • Americas segment: The segment posted revenues of $4.0 billion in fiscal 2Q18, which represents an increase of 7.6% from $3.7 billion in fiscal 2Q17. The revenue growth was driven by positive SSSG of 2.0% and the addition of 320 company-owned and 646 franchised restaurants.
  • CAP segment: The revenue from the segment rose 54.3% to $1.2 billion in fiscal 2Q18. The revenue growth was driven by the addition of 759 net new restaurants, incremental sales from the acquisition of the remaining 50% stake in East China, and positive SSSG of 3.0%.
  • EMEA segment: The segment saw revenues of $266.1 million, which represents growth of 14.8% from $231.7 million in fiscal 2Q18. The revenue growth was driven by the addition of 387 franchised restaurants. However, some of the revenue growth was offset by a decline in same-store sales of 1.0% and a decline in the unit count of company-owned restaurants by nine.
  • Channel development: The segment’s revenue rose 8.4% to $500.2 million. The revenue growth was driven by growth in premium single-serve product sales and a revenue deduction adjustment in fiscal 2Q17. However, some of the revenue growth was offset by the absence of revenue from the Tazo brand.

EPS growth

Year-over-year, Starbucks has seen EPS growth of 17.8%. The EPS growth was driven by revenue growth, a lower effective tax rate, and share repurchases in the last four quarters. However, some of the growth in EPS was offset by a decline in operating margin. The company’s operating margin fell from 17.7% in fiscal 2Q17 to 12.8% in 2Q18. The increase in the cost of sales including occupancy costs, D&A (depreciation and amortization) expenses, and G&A (general and administrative) expenses led to a fall in Starbucks’s operating margin.

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