Can Starbucks Deliver Double-Digit EPS Growth in Q1?

Starbucks (NASDAQ:SBUX) will report its earnings for the first quarter of fiscal 2020 after the market closes on Tuesday. Analysts expect the company to report single-digit revenue growth and double-digit EPS growth. Let’s look at analysts’ estimates in detail.

For the first quarter, analysts expect Starbucks to report revenue of $7.11 billion, which represents growth of 7.2% YoY from $6.63 billion in the first quarter of fiscal 2018. The company’s revenue could rise due to the net addition of new restaurants, positive SSSG (same-store sales growth), and an increase in channel sales.

By the end of the fourth quarter of fiscal 2019, the company operated 15,834 company-owned restaurants and 15,422 franchised restaurants. The numbers represent a rise of 218 company-owned restaurants and 1,173 franchised restaurants compared to the first quarter of fiscal 2019. The company’s revenue will likely increase due to the new restaurants and restaurants opened in the first quarter of fiscal 2020.

In the fourth quarter, Global Coffee Alliance, an alliance between Starbucks and Nestle, introduced three new coffee platforms in 30 markets. Global Coffee Alliance also introduced Starbucks Creamers in North America in the fourth quarter.

Starbucks’s management continues to focus on expanding its delivery service and digital relationships, beverage innovations, and enhancing customers’ in-store experience to drive its SSSG. In July 2019, Starbucks partnered with Uber Eats to roll out the delivery service in 11 of the US markets. The company also planned to expand the service across the country by early 2020. In China, the company expanded the delivery service to 3,000 stores spread across 100 cities by the end of the fourth quarter.

Starbucks increased its active users on the Starbucks Rewards program in the US to 17.6 million by the end of the fourth quarter. Also, the company has focused on its AI initiative, Deep Brew, to personalize customer offerings, optimize labor allocations, and drive inventory management in restaurants. In China, the Starbucks Rewards program had 10 million members by the end of the fourth quarter. The company implemented new initiatives, like voice ordering, delivery through Tmall Genie, and enhanced customer experiences through mobile ordering.

Moving to food and beverage innovations, Starbucks introduced Nitro Cold Brew across its company-owned restaurants in the US by the end of the fourth quarter. Along with Nitro Cold Brew, introducing seasonal beverages could drive the company’s SSSG.

For the first quarter, analysts expect Starbucks to report an EPS of $0.76, which represents 11.4% growth from $0.68 in the first quarter of fiscal 2019. The company’s EPS could increase due to revenue growth, the expanded EBIT margin, and share repurchases.

Analysts expect Starbucks’s EBIT margin to improve from 17.4% to 17.5%. The company’s EBIT margin could improve due to sales leverage from positive SSSG and cost-saving initiatives. From the beginning of the second quarter until the end of the fourth quarter of fiscal 2019, the company repurchased 67.7 million shares for approximately $5.5 billion. Share repurchases lower the number of stocks and drive the company’s EPS.

For fiscal 2020, Starbucks’s management expects its revenue growth to be 6%–8%. They expect the opening of 2,000 new restaurants and global SSSG of 3%–4% to drive the revenue. In the US, they plan to open 600 new restaurants this fiscal year. Management expects the company’s operating margin to improve marginally due to leverage from the positive SSSG, cost-saving initiatives, and overhead efficiencies. They expect Starbucks to report an adjusted EPS of $3.00–$3.05, which represents growth of 6%–7.8% from $2.83 in fiscal 2019.

On October 30, 2019, Starbucks announced quarterly dividends of $0.41 per share. The quarterly dividends represent an annualized payout of $1.64 per share. As of January 24, the company’s dividend yield was 1.75%. In comparison, McDonald’s (NYSE:MCD), Wendy’s (NASDAQ:WEN), and Dunkin’ Brands’ (NASDAQ:DNKN) dividend yields were 2.34%, 2.16%, and 1.91%, respectively, on the same day.

Since the beginning of December 2019, Barclays and J.P. Morgan have upgraded the stock. On January 9, Barclays upgraded the stock to “overweight” from “underweight.” Barclays raised its target price to $107 from $90. On December 12, J.P. Morgan upgraded the stock from “neutral” to “buy.” J.P. Morgan raised its target price to $94 from $90. During the same period, RBC initiated coverage on Starbucks with an “outperform” rating and a target price of $97.

Overall, analysts favor a “hold” rating for Starbucks. As of January 24, 53.1% of the 32 analysts recommend a “hold,” 43.8% recommend a “buy,” and 3.1% recommend a “sell.” On the same day, analysts’ consensus target price was $95.93, which implies a 12-month return potential of 4.2%.

As of January 24, Starbucks was trading at $92.03, which represents a rise of 8.8% since its fourth-quarter results on October 30. The company’s stock price rose due to its impressive fourth-quarter performance and optimistic fiscal 2020 guidance.

After delivering a strong return of 36.5% last year, Starbucks has returned 4.7% in 2020 as of January 24. McDonald’s and Dunkin’ Brands have returned 6.9% and 3.7%, respectively, while Wendy’s has fallen by 0.5%.

The surge in Starbucks’s stock price raised its valuation multiple. As of January 24, Starbucks was trading at a forward PE ratio of 29.0x. The company was trading at 27.1x before the announcement of its fourth-quarter earnings. The company was trading at a premium compared to McDonald’s and Dunkin’ Brands. On the same day, McDonald’s and Dunkin’ Brands were trading at 24.9x and 23.8x, respectively. However, Wendy’s was trading at 34.4x on the same day.

On January 24, Starbucks was trading at 30.2x analysts’ fiscal 2020 EPS estimate of $3.05. The company was trading at 26.8x analysts’ fiscal 2021 EPS estimate of $3.44. Analysts’ EPS estimates represent a growth of 7.8% and 12.7% in fiscal 2020 and fiscal 2021, respectively.