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Starbucks to Report Double-Digit EPS Growth in Q3

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Starbucks (SBUX) is scheduled to report its fiscal 2019 third-quarter earnings results after the market closes on July 25. For the quarter, analysts expect both its revenue and EPS to rise.

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SBUX’s revenue growth

In the third quarter, analysts expect Starbucks to report revenue of $6.67 billion. YoY (year-over-year), they expect its revenue to rise 5.7% from $6.31 billion in the corresponding quarter of the previous year. Its net new restaurant openings and SSSG (same-store sales growth) could drive its revenue. However, the company’s streamlining initiatives could offset some of the increases in its revenue.

By the end of the second quarter of fiscal 2019, Starbucks operated 15,655 company-owned restaurants and 14,529 franchised restaurants. Compared to its number of restaurants at the end of the third quarter of fiscal 2018, the company operated 585 company-owned and 879 franchised restaurants at the end of the second quarter of fiscal 2019. The company’s net addition of new restaurants and the restaurants it opened in the third quarter of fiscal 2019 are likely to drive its revenue.

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SSSG drivers

Starbucks’s management is focusing on expanding its delivery service, growing its digital relationships, and enhancing its in-store experience to drive its SSSG.

SBUX has partnered with Uber Eats to expand its delivery service to seven major markets in the US, which covers approximately 1,600 restaurants. In China, the company is partnering with Alibaba to offer a delivery service in 2,100 restaurants across 35 cities. By the end of this year, SBUX wants to expand the service to 3,000 restaurants spanning 50 cities. Also, the company has rolled out its mobile order and pay app, Starbucks Now, in 300 restaurants in Beijing and Shanghai. The company also plans to expand the feature across its restaurants in China by the end of next year. Along with these initiatives, membership growth in the Starbucks Rewards program and the opening of Starbucks Reserve Roasteries could drive Starbucks’s SSSG during the quarter.

SBUX’s EPS to rise

In the graph above, we can see that SBUX has outperformed analysts’ expectations in each of the last four quarters. For the third quarter, analysts expect Starbucks to report adjusted EPS of $0.72. YoY, the company’s EPS are expected to rise 16.8% from $0.62 in the corresponding quarter of 2018. The company’s revenue growth, lower effective tax rate, and decline in shares outstanding are likely to drive its EPS. However, a lower EBIT margin could offset some of the growth in its EPS.

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Analysts expect SBUX’s EBIT margin to contract from 18.5% to 17.8%. SBUX’s streamlining initiatives, which include the licensing of its consumer packaged goods businesses, could lower its EBIT margin. However, sales leverage from the company’s positive SSSG and cost-saving efforts are likely to offset some of the contraction in its EBIT margin.

From the beginning of the fourth quarter of fiscal 2018 until the end of the second quarter of fiscal 2019, SBUX repurchased 167.8 million shares for $10.8 billion. At the end of the second quarter, the company had the authorization to repurchase 59.5 million shares. Share repurchases will lower its number of shares outstanding, thus boosting its EPS.

Dividends

On April 25, SBUX announced a quarterly dividend of $0.36 per share at an annualized payout rate of $1.44 per share. On July 19, the company’s dividend yield stood at 1.59%, and its stock was trading at $90.30. In comparison, the dividend yields of its peers McDonald’s (MCD) and Dunkin’ Brands (DNKN) stood at 2.2% and 1.9%, respectively.

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Outlook

For fiscal 2019, SBUX’s management expects its revenue to rise in the range of 5%–7%. Its same-store sales are projected to grow between 3% and 4%. The company is planning to open 2,100 restaurants this fiscal year with 1,100 in the China and Asia-Pacific region. It also plans to open 600 in the Americas segment and 400 in Europe, the Middle East, and Africa. For the same period, its management expects its adjusted EPS to be in the range of $2.75–$2.79.

Stock performance

On July 19, Starbucks was trading at $90.30. The company’s stock has risen 17.1% since the announcement of its second-quarter earnings results on April 25. Its impressive second-quarter performance and investors’ optimism over its management’s initiatives drove its stock price. In the second quarter, SBUX reported adjusted EPS of $0.60, outperforming analysts’ EPS estimate of $0.56. The company’s overall SSSG came in at 3.0%, higher than analysts’ expectation of 2.9%. For a detailed analysis of Starbucks’s second-quarter performance, read Starbucks: Key Takeaways from Its Q2 Earnings.

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YTD (year-to-date), SBUX has returned 40.2%. The company has outperformed its peers and the broader equity market this year. During the same period, its peers McDonald’s and Dunkin’ Brands have returned 20.4% and 24.9%, respectively. The S&P 500 Index and the Consumer Discretionary Select Sector SPDR ETF (XLY) have returned 18.7% and 23.4%, respectively, YTD. XLY has invested 7.7% in restaurant and travel companies.

Valuation multiple

The surge of 17.1% in SBUX since its announcement of its second-quarter earnings has also raised its valuation multiple. On July 19, it was trading at a forward PE multiple of 29.8x compared to 26.6x before the announcement of its second-quarter earnings. Starbucks was trading at a premium to its peers. On the same day, McDonald’s and Dunkin’ Brands were trading at forward PE multiples of 25.5x and 25.6x, respectively. Strong SSSG and an aggressive expansion strategy have allowed Starbucks to trade at a higher forward PE multiple.

On July 19, Starbucks was trading at 32.4 times analysts’ 2019 EPS estimate of $2.78 and 29.2 times analysts’ 2020 EPS estimate of $3.10, with its EPS expected rise 15.0% in 2019 and 11.2% in 2020.

Analysts’ recommendations

Since the beginning of June, Wedbush, Wells Fargo, Stifel, Cowen and Company, Jefferies, BMO, and Piper Jaffray have all raised their price targets for SBUX. On June 25, Credit Suisse initiated coverage on the company with an “outperform” rating and a price target of $92.

Overall, analysts favor “hold” ratings for SBUX, with 56.3% of 32 analysts giving it “hold” ratings. On average, analysts have given SBUX a 12-month price target of $83.46, implying a fall of 7.6% from its current price of $90.30.

McDonald’s is set to report its second-quarter earnings results before the market opens on July 26. Stay tuned for our earnings preview.

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