Case Study on Starbucks (SBUX) with Nobias technology
Thus far throughout the Q2 earnings season, retail and apparel stocks have largely posted disappointing results and therefore, negative sentiment surrounds much of this space, with stocks like Walmart (WMT) and V.F. Corp (VFC) trading near their 52-week lows. However, a notable exception to this underperformance in the consumer discretionary space has been in the quick service restaurant segment, with companies like Chipotle (CMG) and Starbucks (SBUX) posting results recently that caused their shares to rally.
Although SBUX shares are down more than 25% on a year-to-date basis, the sentiment surrounding their shares on Wall Street has shifted a bit recently. Starbucks has experienced a bullish rally of nearly 12% during the last month, alone. The company reported second quarter earnings on August 2, 2022, beating consensus analyst estimates on both the top and bottom lines.
Starbucks suspended full-year guidance during this report because of economic uncertainties; however, overall, the news was positive enough to inspire a 3.8% rally. Marianne Wilson, the editor-in-chief of chainstoreage.com and a Nobias 4-star rated author, wrote an article this week, breaking down Starbuck’s fundamental results during Q2.
SBUX Aug 2022
Wilson said, “The coffee giant reported earnings of $912.9 million, or $0.79 a share, for the quarter ended July 3, down from $1.15 billion, or $0.97 a share, in the year-ago quarter. The company cited labor costs and inflation as weighing on its margins”. She continued, “Adjusted earnings totaled of $0.84 a share, a decline from $1.01 a share a year ago. Analysts expected adjusted earnings of $0.77 a share.”
Moving onto the top-line, Wilson stated, “Sales rose 9% to $8.2 billion, up from $7.5 billion a year ago. Same-store sales rose 3%. Same-store sales in North America rose 9%, driven by an 8% increase in the average ticket. U.S. comparable sales increased 9%, primarily driven by an 8% increase in average ticket.” She touched upon SBUX’s international segment, writing, “International comparable store sales fell 18%, driven by a 15% decline in comparable transactions. Comp sales plunged 44% decline in China amid COVID lockdowns. (China is Starbucks’ second biggest market after the U.S.).”
Regarding the company’s digital app presence, Wilson said, “Starbucks said the 90-day active members in its U.S. rewards loyalty program rose to 27.4 million, up 13% compared to a year ago.” She also noted that “The company opened 318 net new stores during the third quarter, for a total of 34,948 stores globally, with 51% company-operated and 49% licensed.”
Leslie Patton, a Nobias 4-star rated author, recently published a report at Yahoo Finance which put a spotlight on SBUX’s performance during the unique inflationary environment that we’re witnessing across the world right now.
Regarding the company’s Q2 earnings, Patton said, “The results reinforce the message found in recent reports from McDonald’s Corp. and Chipotle Mexican Grill Inc.: Americans are still opening up their wallets to eat out -- even if inflation is starting to erode purchasing power.” She noted, “The average ticket -- or cost per order -- rose 6%, but comparable transactions fell 3%. This shows that higher prices are making up for a lower volume of sales.”
Patton paraphrased Howard Schultz, SBUX’s CEO, who touched upon his coffee chain’s pricing power during the quarterly conference call, writing, “He said the company has raised prices by around 5% in the last 12 months. Other coffee sellers have also pushed prices higher with Dutch JDE Peet’s reporting better-than-expected first-half sales Wednesday after increasing prices by 1 euro-cent per cup on average.”
Then, Patton shifted her focus across the Pacific to the Chinese region, which has long been a bright spot, in terms of growth, for Starbucks. She said, “While US diners are still spending -- with cold drinks being a particular standout -- the Chinese market remains a source of uncertainty.” Patton continued, “On-and-off pandemic rules have restricted mobility in major cities, and comparable sales in the country fell 44% during the quarter. That’s deeper than the 39% drop expected by analysts.”
With regard to this issue, Patton said that, “Starbucks said its financial guidance remains suspended “for the balance of this fiscal year” amid unpredictability in China’s pandemic restrictions.” However, she noted that SBUX management highlighted an “immediate improvement” to its Chinese operations recently after dining rooms were allowed to open in Shanghai.
Inflation remains top of mind across the analyst community (especially with several large retailers and consumer discretionary stocks having recently reported disappointing earnings results). However, like Patton, Mary Meisenzahl, another Nobias 4-star rated author, also published an article this week which highlighted the fact that SBUX continues to buck that trend.
Meisenzahl said, “Prices in the food away from home category, which includes restaurants, are up 7.7% over last year according to the Consumer Price Index, and food overall is up 10.4%, meaning dining out is becoming relatively less expensive compared to cooking at home.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Yet, in spite of this, She wrote, “Despite the state of the economy, it's "critically important," interim CEO Howard Schultz told investors in a third-quarter earnings call, "that you all understand we are not currently seeing any measurable reduction in customer spending or any evidence of customers trading down."’ She continued, “Demand has remained strong despite price increases of about 5% over the last year, he said.”
Meisenzahl stated, “Starbucks is unusual compared to other quick service chains in customers not downgrading to less expensive products.” With regard to this strong competitive position, Meisenzahl noted that Shultz highlighted popularity with Gen Z customers, Starbucks "significant competitive advantage" in customizing drinks, and its unique cold beverage offerings, as reasons for his company’s relative strength.
Although SBUX shares have rallied 11.8% during the last month, the credible authors that Nobias follows remain largely bearish on the company’s forward prospects. 79% of recent articles published by the credible authors that the Nobias algorithm tracks (only those with 4 and 5-star Nobias ratings) have included a “Bearish” bias for SBUX shares. And, the credible analyst community that Nobias tracks is also largely negative on the stock’s prospects. 4 out of the 6 credible Wall Street analysts that Nobias tracks (once again, only those with 4 and 5-star ratings) believe that the value of SBUX shares is likely to fall. Right now, the average price target amongst the credible analysts covering SBUX is $88.83. Today, SBUX trades for $86.87. Therefore, this average price target implies relatively tepid upside potential of approximately 2.2%.
Disclosure: Nicholas Ward is long SBUX. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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