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Source: Getty Images

Will Starbucks’s Q3 Earnings Boost Its Stock Price?

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Starbucks is set to report its Q3 earnings after the market closes on July 28. This year, the company’s stock has fallen over 14 percent. Starbucks’s weak performance in the second quarter amid the COVID-19 outbreak and a disappointing update last month appear to be weighing on its stock. Let’s look at analysts’ expectations.

Starbucks’s top line could sink more than 40 percent

In the third quarter, analysts project Starbucks to report revenue of $4.06 billion, which would be 40.5 percent lower than its $6.82 billion in revenue in the previous year's corresponding quarter. A decline in its SSSG (same-store sales growth) could lower the company's revenue.

In its update last month, Starbucks announced it could lose $3.2 billion in sales due to the pandemic. The company estimated its same-store sales could fall by 40 to 45 percent in the U.S., and 20 to 25 percent in China.

Because of the pandemic, Starbucks had to close some of its restaurants. Restaurants that were open operated only through delivery and take-away service while closing their dining spaces, which could lower the company's SSSG. 

Starbucks’s Q3 earnings could bring a loss

Starbucks has projected a loss per share of $0.55–$0.70 in its third quarter. Meanwhile, analysts expect the company to report EPS of -$0.59, which represents a significant fall year-over-year from $0.78.

Along with sales declining, narrower EBIT margins and higher interest rates could drag down the company's EPS. A lower effective tax rate and share count could offset some of the decline.

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Source: Starbucks press release

Sales deleveraging from negative SSSG and increased expenses from COVID-19 assistance pay, employee hygiene, cleaning, and delivery expenses could pressure the company’s margins. During the pandemic, the company has raised additional capital through various debt facilities to strengthen its liquidity position. That higher debt could raise its interest expenses and lower its EPS.

Dividend yield and valuation

On June 24, Starbucks announced quarterly dividends of $0.41 per share at an annualized payout of $1.64 per share. As of yesterday, the company's dividend yield was 2.17 percent, and peers McDonald's and Dunkin' Brands had dividend yields of 2.59 percent and 2.37 percent, respectively.

Despite its decline, Starbucks stock has a higher valuation multiple. As of yesterday, its forward PE multiple was 32.5x, compared with its average multiple of 26.2x over the last three years. Meanwhile, McDonald’s and Dunkin’ Brands have forward PE multiples of 24.4x and 28.1x, respectively. 

Analysts’ recommendations after Starbucks’s Q3 earnings

After Starbucks’s June 10 update on its operations, analysts’ reactions were mixed. RBC, Citigroup, and Telsey Advisory Group all lowered their price targets, while KeyBanc downgraded the stock to “sector weight.” Conversely, Jefferies and Piper Sandler raised their price targets, and Wells Fargo initiated coverage of Starbucks with a price target of $92. 

Of the 36 analysts covering Starbucks, 39 percent suggest "buy," 58 percent suggest "hold," and 3 percent suggest "sell." Their consensus price target of $80.28 represents a 12-month return potential of 6.5 percent.

My take on Starbucks after Q3 earnings

I’m bearish on Starbucks. With the unemployment rate still high, I expect the company's sales to be on the lower side for some time. Also, as the stock's valuation looks very expensive, investors should wait until the company reports its third-quarter earnings before making any investment decisions. McDonald's is also reporting its earnings on July 28

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