Starbucks(NASDAQ: SBUX)is scheduled to announce Q2 earnings after market closes on Tuesday, May 3.
Latest Results and FY22 Guidance
For the three months ended Jan. 2, Starbucks reported per-share earnings of 72 cents, after adjusting for one-time items, below analysts' expectations of 80 cents per share, according to FactSet.
It reported net income of $816 million, up 31% from a year earlier. The chain's total sales of $8.1 billion topped expectations of $7.98 billion.
Starbucks reported a same-store sales increase of 18% at U.S. stores compared with a year earlier. Sales weakened in the latter part of the quarter, during the Omicron surge, the company said. China, a significant market for the chain, suffered during the period, with same-store sales falling 14%, Starbucks said.
Its executive says the company expects FY22 GAAP EPS to decline by 4%-6% and Non-GAAP EPS to grow 8%-10%, and expects FY22 GAAP operating margin will approach 16.5%, Non-GAAP to approach 17%.
3 Most Important Things to Watch
1. Schultz’s Early Moves at Starbucks Suggest Deeper Changes Coming
Schultz led Starbucks’s aggressive expansion in the 1980s and ’90s before stepping down as CEO in 2000. He returned again as CEO from 2008 to 2017. In his third go-around, the 68-year-old is also rejoining the board and handling day-to-day operations.
He’s already frozen stock repurchases that were part of a $20 billion package, saying the money would be better spent on employees and cafe improvements. And he dismissed the company’s top lawyer while pledging to offer better benefits for workers to dissuade them from unionizing.
2. Coffee prices remain elevated on supply and demand
Supply and demand was mixed with stronger demand from China and higher supply from Vietnam. The USDA Foreign Agricultural Service projected that China's 2022 coffee imports would grow by +5% this year to 4 million bags. Also supportive of higher prices was dry weather in Brazil, with rainfall in the Minas Gerais area, which makes up 30% of Brazil's arabica crop, was only 40% of the historical average.
On the bearish side, the Green Coffee Association reported this week that US March green coffee inventories rose +1.0% m/m and +2.5% y/y to 5.82 million bags.
With no end in sight to the Ukraine tensions, there are fears that Russia's invasion of Ukraine will add to inflation, curb consumer spending, and reduce coffee consumption as consumers tighten their belts.
For Starbucks, that may not mean that coffee house visits are reduced, but that the average spend is reduced.
Signs of tighter global coffee supplies are providing a bullish stimulus for prices and pushed arabica coffee up to a 10-1/2 year nearest-futures highs on Feb 10. The International Coffee Organization also cut its global 2020/21 supply estimate to a deficit of -3.13 mln bags from a previous estimate of a +1.2 mln bag surplus.
Another headwind would come from a potential structural low in the Brazilian Real. Brazilian production costs, including labor and other expenses, are in the Brazilian real. A falling real weighs on arabica coffee’s price as Brazilian supplies have lower production costs and can fetch more dollars. A rising real has the opposite impact, pushing coffee prices higher.
3. Sales in China and Europe Are a Great Concern
A further headwind for the company will come from the strict lockdowns in China, which are being enforced due to Coronavirus. The US and China make up 61% of the company's global footprint and Starbucks also wanted to start a more aggressive expansion in China. In Q1 results, China's comparable store sales were down 14% and it is hard to see that getting better with the prolonged lockdowns.
The real problem will come from forward guidance and the following quarters. Operations have been suspended in Russia, while Chinese consumers are locked down in big cities like Shanghai. At home and in Europe, consumers are being squeezed by soaring inflation that could see them reduce their average spending.
Analyst Opinions
BTIG analyst Peter Saleh maintained a “Buy” rating and offered a $110 price target. Saleh adjusted the rating while cutting the 2022 and 2023 earnings estimates to reflect the uncertainty of unionization, the high probability of wage and benefit investment, and the recently announced suspension of share repurchase. But Saleh believes that the risk to traffic is nominal as only 4% of consumers responding to the BTIG survey claim they will not visit anymore if an agreement on unions is not reached.
Zacks Investment Research cut it from a hold rating to a sell rating and gave it an $83.00 target price. According to Zacks, “Although shares of Starbucks have underperformed the industry in the past six months, it might take a U-turn as the company is benefiting from store growth, robust digitalization and comps growth. During first-quarter fiscal 2022, global comparable store sales increased 13% year over year, driven by an increase in comparable transactions and average ticket growth. For fiscal 2022, the company anticipates global comparable sales to reach high-single digits. Starbucks expects to open nearly 2,000 net new stores worldwide in fiscal 2022. However, dismal China's performance continues to hurt Starbucks. During the fiscal first quarter, comps in China declined 14% year over year against a 5% growth reported in the prior-year quarter. Strategic investments and cost inflation might impact the company’s earnings in 2022.”
MKM Partners analyst Brett Levymaintained a “Buy” rating and offered a $110 price target. Levy adjusted the rating as part of a broader research note on restaurants heading into Q1 earnings. And many of the moving parts facing the group are skewing negatively, including pricing, inflation, and demand-related issues. Plus Levy pointed out that the company is facing choppy international demand picture.
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