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Starbucks (SBUX) Q1 Earnings & Revenues Miss, Stock Dips

Starbucks Corporation SBUX reported first-quarter fiscal 2023 results, with earnings and revenues missing the Zacks Consensus Estimate. However, both top and bottom lines increased year over year. Following the results, the company’s shares moved down 1.8% in the after-hour trading session on Nov 3, 2022.

Discussion on Earnings, Revenues & Comps

In the quarter under review, the company reported adjusted earnings per share (EPS) of 75 cents, missing the Zacks Consensus Estimate of 77 cents by 2.6%. However, the bottom line increased 4.2% year over year from an adjusted EPS of 72 cents reported in the prior-year quarter.

Quarterly revenues of $8,713.9 million lagged the Zacks Consensus Estimate of $8,805 million by 1%. However, the top line increased 8.2% on a year-over-year basis. The upside was primarily driven by growth in comparable store sales and net-new store on a year-over-year basis.

This and solid performances in global licensed store businesses added to the positives. Global comparable store sales increased 5% year over year. The upside was primarily driven by a 7% rise in average tickets.

In the fiscal first quarter, Starbucks opened 459 net new stores worldwide, bringing the total store count to 36,170.

Starbucks Corporation Price and EPS Surprise

 

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Starbucks Corporation price-eps-surprise | Starbucks Corporation Quote

Overall Margin Falls in Q1

On a non-GAAP basis, the operating margin in fiscal first quarter was 14.4%, down from 14.6% reported in the prior-year quarter. The downside was primarily caused by inflationary pressures and sales deleverage (related to COVID-19 restrictions in China).

Higher investments in labor growth (including enhanced store partner wages and new partner training) were added concerns. However, this was partially offset by strategic pricing in North America and sales leverage across markets (outside China).

Segmental Details

Starbucks has three reportable operating segments — North America, International and Channel Development.

North America: This segment’s fiscal first-quarter net revenues were $6,551.3 million, up 14% year over year. The segment benefited from 10% growth in company-operated comparable store sales, new store growth and higher contribution from licensed store sales. Average ticket and transaction increased 9% and 1%, respectively.

The operating margin in the North American segment was 18.5% compared with 18.9% reported in the prior-year quarter. A rise in commodity and supply-chain costs (on account of inflationary pressures) and investments in labor growth acted as headwinds. These were partly offset by strategic pricing and sales leverage.

International: This segment’s fiscal first-quarter net revenues were $1,680.1 million, down 10.4% year over year, primarily due to a 13% decline in comparable store sales (owing to suppressed mobility in China) and a 13% unfavorable impact from foreign currency translation. The decline was marginally overshadowed by net new store openings (8% year over year), higher product sales and royalty revenues.

The operating margin in the segment contracted 1700 basis points (bps) year over year to 14.3%. The downside can be attributed to sales deleverage in China. However, this was partially offset by lapping amortization expenses, business mix and sales leverage across markets outside China.

In the fiscal first quarter, comps in China declined 29% year over year (compared with a 16% fall reported in the previous quarter). The downtick was caused by a 28% decline in transactions and a 1% decrease in average tickets.

Channel Development: Net revenues in the segment increased 14.6% year over year to $478.2 million. The upside was primarily driven by growth in its ready-to-drink business and Global Coffee Alliance.

Meanwhile, the segment’s operating margin expanded 340 bps year over year to 47.3%. The upside was primarily driven by strength in its North American coffee partnership joint venture income.

Financial Details

The company ended the fiscal first quarter with cash and cash equivalents of $3,186.5 million compared with $2,818.4 million as of Oct 2, 2022. As of Jan 1, long-term debt totaled $13,176.7 million compared with $13,119.9 million as of Oct 2, 2022.

Meanwhile, the company declared a quarterly cash dividend of 53 cents per share. The dividend is payable on Feb 24 to shareholders of record as of Feb 10.

Other Updates

The Starbucks Rewards loyalty program’s 90-day active members in the United States increased to 30.4 million, reflecting a year-over-year increase of 15%.

Fiscal 2023 Guidance

The company reiterated its fiscal 2023 guidance. It anticipates global comparable sales to reach the high end of the 7-9% target. During the year, the company expects store count in the United States and China to grow 3% and 13%, respectively, on a year-over-year basis. Capital expenditure is estimated to be $2.5 billion.

Consolidated revenues for fiscal 2023 are anticipated to grow 10-12% on a year-over-year basis. For fiscal 2023, the company anticipates non-GAAP EPS growth to be at the low end of 15-20%.

Zacks Rank & Key Picks

Starbucks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Retail-Wholesale sector are Compass Group PLC CMPGY, Darden Restaurants, Inc. DRI and Yum! Brands, Inc. YUM.

Compass Group currently carries a Zacks Rank #2 (Buy). CMPGY has a long-term earnings growth rate of 19.6%. The stock has gained 3.4% in the past year.  

The Zacks Consensus Estimate for Compass Group’s 2023 sales and EPS suggests growth of 44.4% and 24.7%, respectively, from the year-ago period’s reported levels.

Darden currently carries a Zacks Rank #2. DRI has a long-term earnings growth rate of 9.8%. Shares of DRI have gained 4.4% in the past year.

The Zacks Consensus Estimate for Darden’s 2023 sales and EPS suggests growth of 7.9% and 5.4%, respectively, from the year-ago period’s reported levels.

Yum! Brands currently carries a Zacks Rank #2. YUM has a long-term earnings growth rate of 11.5%. Shares of YUM have gained 3.1% in the past year.

The Zacks Consensus Estimate for Yum! Brands’ 2023 sales and EPS suggests growth of 6.5% and 15.6%, respectively, from the year-ago period’s reported levels.

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