Starbucks’s (SBUX) reported a diluted EPS of $1.12 in the third quarter. However, removing unusual items, Starbucks’s Q3 EPS was $0.78, which outperformed analysts’ expectation of $0.72. In the following graph, you can see that Starbucks beat analysts’ estimates in all of the previous four quarters.
Starbucks’s Q3 EPS growth
Year-over-year, Starbucks adjusted Q3 EPS rose 25.8% from $0.62 in the third quarter of 2018. The revenue growth and lower number of shares outstanding drove the company’s EPS during the quarter. However, the lower EBIT margin, increased interest expenses, and higher effective tax rate offset some of the increases in the EPS.
Fall in Starbucks’s EBIT margin
For the third quarter, Starbucks reported an EBIT margin of 18.3% compared to 18.5% in the third quarter of 2018. Licensing the Channel Development business to Nestle lowered Starbucks’s EBIT margin by 0.7%. However, excluding the impact of streamlining initiatives, the company’s EBIT margin increased 0.5%. The sales leverage from the strong SSSG and the company’s cost-saving efforts drove its margins. However, the investment in growth initiatives, like technology, and Siren Retail offset some of the expansions. Siren Retail consists of the company’s Roastery, Starbucks Reserve, and stand-alone Princi bakeries.
In the third quarter, Starbucks repurchased 6.8 million shares. In the last four quarters, the company repurchased approximately 185 million shares. The repurchases caused the company’s average number of shares outstanding to fall to 1.22 billion. For the third quarter of fiscal 2018, the company’s average number of shares outstanding was 1.39 billion.
Following the impressive performance in the third quarter, Starbucks’s management raised its sales guidance for fiscal 2019. Now, the same-store sales will likely grow 4% compared to the previous guidance range of 3%–4%. Due to slower unit development in the EMEA region, the company lowered its net new store guidance. The company’s management expects to add net 2,000 restaurants this fiscal year compared to the previous guidance of 2,100 restaurants.
Despite lowering the unit growth guidance, the company expects its revenue growth to be at the higher end of its earlier stated guidance of 5%–7%. The adjusted EPS guidance increased to $2.80–$2.82 from the previous guidance of $2.75–$2.79.
Following Starbucks’s third-quarter earnings, Stifel, Jefferies, and Cowen and Company raised their target prices. Stifel raised its target price from $86 to $90, while Jefferies raised its target price from $96 to $110. Cowen and Company increased its target price from $77 to $93.
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