Why is Starbucks (SBUX) up 3.3% since its last earnings report?

It has been about a month since Starbucks (SBUX) last reported earnings. Shares rose about 3.3% in that time, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Starbucks headed for a recession? Before we dive into the recent reaction from investors and analysts, let’s take a quick look at the company’s most recent earnings report in order to get a better handle on the important factors influencing the situation.

Starbucks Estimated Second Quarter Earnings Lag

Starbucks reported fiscal second-quarter 2024 results, with earnings and revenue missing the Zacks Consensus Estimate for the second consecutive quarter. Both the top and bottom lines have declined year over year. Following these announcements, the company’s shares fell 11.6% during the April 30 after-hours trading session.

CEO Laxman Narasimhan expressed disappointment with the quarterly results, attributing it to the difficult situation the company finds itself in. Despite the setbacks, he emphasized faith in the strength of the brand, the team’s capabilities and the promising opportunities ahead.

Discussion about earnings, revenues and statements

For the fiscal second quarter, SBUX reported adjusted earnings per share (EPS) of 68 cents, missing the Zacks Consensus Estimate of 79 cents by 13.9%. Bottom line declined 8.1% from 74 cents reported in the prior-year quarter.

Quarterly revenues of $8,563 million missed the Zacks Consensus Estimate of $9,140 million. Net revenue declined 1.8% year-over-year, primarily due to dismal store performance in the U.S. and China. The company’s performance in China was impacted by a decline in casual customers, changes in holiday patterns, increased promotional activity and normalization of customer behavior.

Global comparable store sales declined 4% year-over-year. The downside was a 6% decline in comparable transactions, partially eclipsed by a 2% increase in average ticket volume.

During its fiscal second quarter, Starbucks opened 364 net new stores worldwide, bringing its total store count to 38,951.

General margin contracts in the second quarter

On a non-GAAP basis, operating margin was 12.8%, down 150 basis points from the prior-year level. The decline was primarily due to several factors, including increased costs resulting from investments in employee compensation and benefits, increased promotional activities and the use of profits from the sale of the Best Coffee brand in Seattle. Contributing to these misfortunes were higher general and administrative costs, particularly related to supporting SBUX initiatives to reinvent the company. However, some of these losses were mitigated through price adjustments and improved operational efficiency in stores.

Segment details

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

North America: Segment net revenues were $6.4 billion, unchanged year over year. Comparable store sales declined 3% compared to growth of 12% in the prior-year quarter. Average transaction decreased by 7%, while ticket changes increased by 4% year-on-year.

Operating margin was 18% compared to 19.1% in the year-ago quarter. The decline was due to a combination of deleveraging, additional investments in store partner salaries and benefits, and increased promotional efforts.

International: Segment net revenues of $1.8 billion declined 5% year-over-year. Comparable store sales declined 6% year-over-year due to a 3% decline in transactions and tickets.

Operating margin declined 370 basis points (bps) year-over-year to 13.3%. The downside was investments in remuneration and benefits for store partners, changes in sales assortments and promotional activities.

In the second fiscal quarter, comparable sales in China declined 11% year-over-year. This indicator increased by 3% compared to the previous year’s quarter. A 4% and 8% decline in transaction and ticket volumes negatively impacts the company’s performance in China.

Channel development: Net revenue declined 13% year-over-year to $418.2 million. The dismal results were due to a decline in Global Coffee Alliance’s revenues.

Operating margin declined 280 basis points year-over-year to 51.7%. This was mainly due to the use of profits from the sale of the best coffee brand in Seattle.

Financial details

SBUX ended the fiscal second quarter with cash and cash equivalents of $2.8 billion, up from $3.6 billion as of October 1, 2023. As of March 31, total long-term debt was $15.5 billion, up from $13 .5 billion dollars as of October 1, 2023.

Meanwhile, management declared a quarterly cash dividend of 57 cents per share. The dividend will be paid on May 31 to shareholders of record as of May 17.

Other updates

The number of active Starbucks Rewards loyalty program members in the United States increased to 32.8 million over a 90-day period, an increase of 6% year over year.

Guidelines 2024

For fiscal year 2024, management expects global revenue growth to be in the low single digits compared to its prior guidance of 7% to 10% growth. Global and US economic growth is forecast to range from low single-digit contraction to flat levels, compared with earlier expectations for growth of 4-6%. The company predicts that the index will decline by 12% year-on-year in China.

Management forecasts global net store growth of approximately 6%, compared to previous estimates of 7%. In fiscal 2024, both GAAP and non-GAAP EPS are expected to improve in the flat to low single digits compared to prior estimates of 15% to 20% growth.

How have estimates changed since then?

Over the last month, investors have seen a downward trend in estimate revisions.

Due to these changes, the consensus estimate moved -13.25%.

VGM results

At this point, Starbucks’ average Growth Score is a C, although it lags well behind its Momentum Score of F. However, Starbucks stock is assigned a grade of C on the value side, ranking in the middle 20% for this investment strategy.

Overall, the stock has a Total VGM Score of D. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. No wonder Starbucks has a Zacks Rank #4 (Sell). We expect a below-average rate of return on stocks in the coming months.

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