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Starbucks Soars on Solid Q4 Earnings and Comps Growth

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Starbucks (SBUX) stock gained 3% during yesterday’s extended trading session after the company reported strong Q4 earnings and comps (comparable-store-sales) growth. The company’s non-GAAP Q4 earnings of $0.70 were in line with analysts’ expectations and grew 13% YoY (year-over-year). Increased revenues and reduced share outstanding mainly drove Starbucks’ Q4 earnings higher.

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Starbucks grows while competitors slump

Starbucks’ Q4 earnings were surprising. This is because one of its biggest competitors recently posted lower-than-expected Q3 results. McDonald’s (MCD) Q3 revenues of $5.43 billion fell short of analysts’ expectations of $5.49 billion. Also, quarterly earnings of $2.11 per share missed consensus estimates by $0.10. Moreover, McDonald’s top- and bottom-line results stayed almost flat YoY.

Starbucks’ other close peer Dunkin’ Brands (DNKN) will report Q3 earnings today. Analysts expect Dunkin’ revenues to grow 2.5% YoY, but they expect earnings to decline by 2.4% YoY.

Rewards program drove Starbucks’ Q4 earnings higher

Starbucks’ Q4 earnings of $6.75 billion beat Wall Street estimates of $6.68 billion and grew 7% YoY. Global comps rose 5% YoY due to a 3% increase in average tickets and a 3% rise in volume.

Quarterly revenues improved mainly due to additions of nearly 2,000 new stores over the last 12 months, improved customer experience, and strong product lineups. Also, the coffee company’s top-line results benefited from its Rewards program. The Rewards program’s active membership grew 15% YoY to 17.6 million in the fourth quarter. The company plays a big role in growth as customers’ spending grows after they join the Rewards program.

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Higher wages offset Starbucks’ Q4 earnings growth

The company continues to invest in elevating partners’ as well as the customers’ experience. This is helping it drive traffic to its stores. The coffee chain retailer is trying to enhance customer relationships by using technology and providing convenience and personalized offers.

Starbucks’ Q4 earnings growth was partially offset by the lower operating margin. The coffee chain operator’s operating margin contracted 90 basis points YoY to 17.2%. This is mostly due to growing investment in in-store partners and higher wages. The growth in operating expenses more than offsets the benefit of higher revenues and cost savings from supply chain efficiencies.

Operating segment performances

During the fourth quarter, Starbucks realigned its operating segments to reflect its business structures better. As part of its restructuring initiatives, the company merged the China/Asia Pacific and Europe, Middle East, and Africa segments. The merged businesses have been named the International division. Now, the coffee chain has three reportable segments: the Americas, International, and Channel Development.

The Americas’ division sales grew 9% YoY to $4.65 billion. This was mainly driven by comps growth and new store additions. Comps grew 6% YoY due to a 3% rise in average tickets and a 3% increase in transactions. The company added 607 net new stores over the last 12 months.

Revenues from the International segment grew 6% YoY to $1.57 billion. International comps grew 3% YoY due to a 1% growth in transactions and a 3% rise in tickets. Also, the company added 1,337 net new stores internationally over the past 12 months.

The Channel Development revenues fell 6% YoY to $508.1 million. The fall was mainly due to the licensing of Starbucks’ CPG (consumer packaged goods) and Foodservices businesses to Nestle.

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Fiscal 2019 performance

For fiscal 2019, Starbucks reported revenues of $26.51 billion. This beat analysts’ estimates of $26.44 billion and increased 7% YoY. The company’s non-GAAP earnings grew 17% YoY to $2.83 per share and beat analysts’ expectations by a penny.

Starbucks’ fiscal 2019 non-GAAP operating margin contracted 80 basis points YoY to 17.2%. This is due to higher wages and growing investment in in-store partners. During the fiscal year, the company returned about $12 billion to shareholders through share repurchases and dividend payments.

Also, the coffee chain raised quarterly dividend rate by 14% to $0.41 per share. The increased dividend will be payable on November 29 to shareholders of record date as of November 13.

Starbucks’ fiscal 2020 outlook

Let’s look beyond Starbucks’ Q4 earnings. For fiscal 2020, Starbucks expects its revenue growth to be between 6% and 8%. Wall Street analysts expect revenues of $28.5 billion for fiscal 2020. This shows a YoY growth of 7.4%. The company expects global comps to rise by 3% to 4%. Also, the coffee chain expects to add about 2,000 new stores. About 600 will be in the Americas and 1,400 will be international.

Starbucks forecasts operating income to grow by 8% to 10% in fiscal 2020 while operating margin to improve modestly. The company expects interest expenses of approximately $415–$425 million and an effective tax rate between 22% and 24%. In fiscal 2020, the coffee chain operator forecasts capital expenditures of nearly $1.8 billion.

Based on the assumptions mentioned above, the company expects non-GAAP earnings per share between $3.00 and $3.05. Wall Street analysts’ consensus earnings estimate for fiscal 2020 is $3.08 per share.

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