Starbucks Corporation: Wall Street Has Bullish Appetite For the Company

Starbucks: Wall Street Has Bullish Appetite For the Company
Starbucks’ sales growth slows, however, the earnings managed to meet forecast in this quarter

On Thursday, Starbucks Corporation (NASDAQ:SBUX) announced its weaker-than-expected third quarter earnings results for fiscal 2016. Following the earnings, the stock plummeted more than 2.5% to $56.08 during after-market hours.

After the earnings release, many analyst issued their research notes on Starbucks, recommending their clients to buy, hold or sell the stock. These analysts have mixed reviews; some are satisfied with the earnings while others are not.

Recently, RBC Capital David Palmer maintained her overweight rating and $68.00 price target on Starbucks stock, following the company’s earnings results.

The analyst noted: "We are maintaining our FY16 EPS but trimming our FY17 EPS estimate to account for labor investments and a diminishing tailwind from input costs. We remain confident Americas SSS growth will return to 5% in F4Q, but difficult comparisons could mean a chance of another sub-5% comp as early as the December quarter."

Jefferies analyst Andy Barish slashed his target price on Starbucks, but remains bullish by maintaining Buy rating. The analyst believes that though the company reported in-line EPS,” the quality was low as slower SSS and continued investments in partners and digital was offset by a low tax rate and buybacks.”

Similarly, Nomura Securities analyst Mark Kalinowski restated his Buy rating and $70 price target on Starbucks after the quarterly results. The analyst believes that the company has shown that it is not “immune from the restaurant industry's sequential deceleration in same-store sales”

In its 3Q earnings, the coffee retailer reported that its sales surged nearly 7.3% $5.24 billion on year-over-year basis. The reported revenue is slightly lower than analysts’ expected figure of $5.34 billion. The company witnessed a slowdown in its same-store sales growth in the America, which is the biggest region for the retailer. The same-store sales in America jumped 4%, decelerating from a 7% growth that it had in the previous quarter. The analysts were anticipating an increase of 6.1% for the reported quarter.

According to the company, global social and political unrest were to be blamed for the disappointing results in Europe and the US due to which the company missed its sales target for the third consecutive quarter.

Starbucks executives called this quarter as an “anomaly,” due to terror concerns around the world, along with civil unrest and political uncertainty in its domestic market and a “profound weakening in consumer confidence.”

During a conference call to discuss third-quarter results, Starbucks Chief Executive Howard Schultz said: “In Starbucks’s 24 years of public life, I can’t recall a quarter quite like.”

During the quarter, domestic sales for the Seattle-based coffee retailer soared 8%, while its comparable stores sales grew 4%. As compared to previous year, the coffee retailer reported increase of 13% in sales and 8% in comps.

During the conference call with analysts, Starbucks officials tried to comfort concerns over a possible sales slowdown in the US and disturbance that is brought on the company’s modifications in its loyalty program, which has promised to return the US business to historic levels of at least 5% comparable-sales increases.

Recently, the company has changed its loyalty program to focus more on customers’ actual spending instead of how often its customers visit its stores. Though Starbucks officials had warned that it could see more “noise” from its customers as some of them are pushing back. They further added on Thursday that in the latest period this loyalty program increased to 12.3 million active members in the US, which reflects an increase of 18% from a year ago.

As per the giant coffee chain, its comparable sales in Middle East, Europe, and Africa dropped 1%, as compared with analysts’ expectation of 2.8% increase. However, overall sales in the region plummeted 7% in part linked to instability in the UK — Starbucks largest market in Europe.

On the other side, it witnessed weaker-than-expected comparable sales of 3% growth in its China and the Asia Pacific region. China, which is its major pillar in international expansion and the one which Starbucks executives anticipates will surpass US as its single market, has also witnessed just a 7% increase in comparable-store sales. Starbucks, with currently around 2,300 stores in China, aims to have over 3,400 stores by 2019.

Mr. Schultz said that the company has a "clear line of sight to returning our U.S. business to historic levels of comp sales growth which had been at or above 5% for the 25 consecutive quarters prior to Q3."

The giant coffee house slightly reduced its annual sales forecast and announced that it now predicts full-year sales growth to increase at a mid-single digit percentage rate. The coffee retailer was previously anticipating full year sales growth to come in above the mid-single digits.

However, the company still expects that its adjusted full-year earnings will come between the range $1.88-$1.89 per share. For the 4Q, it anticipates adjusted earnings between 54 cents and 55 cents per share.

Earlier this month, Starbucks announced that it is going to give raise to many of its employees in its domestic stores in order to respond to the tightening labor market that has put pressure on some US companies to increase wages.

During the conference call, Starbucks Chief Executive Officer Scott Maw said that a wage hike is all set to go into effect in October and this has already been catered into its guidance and hence it will not affect its profit outlook.

Mr. Maw said: “There’s no wavering in our commitment to deliver at least 15% EPS growth every year,” adding, “that is true for 2017.”

Overall, the coffee retailer reported the net profit of $754 million, or EPS of $0.51 in contrast to net profit of $626.7 million, or EPS of $0.41 a year ago. Excluding certain items, the profit per share was $0.49, as opposed to $0.42 a year back.

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