INVESTMENT THESIS
Starbucks Corp. (NGS: SBUX). We think that specialty coffee retailers will be particularly hurt by the coronavirus pandemic and that some smaller coffee retailers will have to close, reducing competition for Starbucks. In addition, because Starbucks has paid its employees hazard pay during the pandemic, we believe it is less likely than other restaurant chains to have difficulty retaining employee.
RECENT DEVELOPMENTS
On October 28 after the close, Starbucks posted fiscal 4Q20 operating earnings of $0.51 per share, down from EPS of $0.70 in the prior-year period but much better than the consensus estimate of $0.31 per share. The decline reflected a 9% decrease in overall same-store sales, offset in part by a modest decline in the share count. Reflecting the lower comps, offset in part by the addition of 480 stores, revenue fell 8% to $6.2 billion – $140 million above the consensus estimate.
In the U.S., same-store sales also fell 9%. In 1Q20, SBUX changed to a new reporting method that combines EMEA and China/Asia Pacific into an International division. The new division saw comps fall 10% in fiscal 4Q20, reflecting 15% lower customer traffic, offset in part by a 7% increase in the average ticket. In China, same-store sales fell 3%, below the consensus estimate of a 2.7% decline. Overall comps declined 9%, reflecting a 23% decline in traffic, partly offset by a 17% improvement in the average ticket. The operating margin fell to 13% from 17%. In 4Q20, weighted-average shares outstanding fell 2% to 1.18 billion.
For all of FY20, revenue fell 11% to $23.5 billion, with same-store sales down 14%. Full-year earnings fell to $1.16 per share from $2.83 in FY19.
EARNINGS & GROWTH ANALYSIS
For the first quarter of FY20, Starbucks expects EPS between $0.50 and $0.55.
Management expects global comps to increase 18%-23% in FY21. It said it expects revenue between $28.0 billion and $29.0 billion. At the midpoint, that is above the consensus estimate of $28.2 billion prior to the earnings announcement. Prior to the earnings release, the consensus estimate had called for earnings of $2.72 per share However, full-year earnings reflect a $0.10 benefit from a 53rd week.
We are setting a preliminary estimate of $3.30 per share.
FINANCIAL STRENGTH & DIVIDEND
The adjusted operating margin was 13% in 4Q20, down from 17% in the prior year period due to sales deleveraging. Interest expense rose to $125 million in 4Q20 from $96 million in 4Q19.
On April 8, management said that it had secured an additional $5.25 billion in short and long-term funding.
RISKS
Efforts by McDonald’s to sell gourmet coffee and aggressive expansion by Dunkin Donuts and even Tim Horton’s could hinder Starbucks’ growth. The price of SBUX shares usually reflects the market’s expectations for high growth, and could drop sharply if the company reports disappointing earnings or same-store sales. In the U.S., unit growth could also reach the point where new locations cannibalize sales at existing stores. In addition, the company’s international expansion plans could prove overly ambitious. Finally, increases in food and beverage costs could reduce margins and earnings.
COMPANY DESCRIPTION
Starbucks is a leading retailer of fresh-brewed coffee and branded merchandise. Its brands include Starbucks, Tazo Tea, and Frappuccino. With a market cap of more than $90 billion, SBUX shares are generally considered large-cap growth.
VALUATION
On October 30, SBUX shares fell nearly 4% as investors appeared displeased with guidance. However, shares have since recovered. Our target price of $100, combined with the dividend, implies a potential total return of 14% from current levels.
On November 4, BUY-rated SBUX closed at $89.79, up $1.40.
Source: Argus
