Factors Setting The Tone For Starbucks' (SBUX) Q1 Earnings

Starbucks Corporation (NASDAQ:SBUX) is scheduled to report first-quarter fiscal 2019 results on Jan 24, after the closing bell. In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 5.1%. The bottom line either outpaced or matched the estimate in the trailing four quarters, resulting in an average beat of 5.6%.

Q1 Expectations

The question lingering in investors’ minds now is whether Starbucks will be able to deliver a positive earnings surprise in the quarter to be reported. The Zacks Consensus Estimate for first-quarter earnings is pegged at 65 cents, flat from the year-ago quarter. Of late, the company’s earnings estimates have been stable. For revenues, the consensus mark is pinned at nearly $6,485 million, up 6.8% from the prior-year quarter.

Let’s delve deeper to find out how the company’s top and bottom line will shape up in first-quarter fiscal 2019.

Factors at Play

In the quarter to be reported, Starbucks’ top line is likely to benefit from the Americas and China-Asia-Pacific (CAP) segments’ robust performance. In fourth-quarter fiscal 2018, revenues at both the Americas and CAP increased 8% and 41%, respectively. Also, new store additions, expansion in China and positive global comparable store sales are likely to aid the company’s results. In fiscal 2018, Starbucks added 2,300 net new stores (excluding Teavana closures), marking an increase from roughly 2,250 net new locations in 2017. In fiscal 2019, the company plans to add 2,100 net new stores.

Meanwhile, Starbucks' business in China is rapidly growing owing to innovative store designs, local product innovations and the success of MSR program. In an effort to expand its footprint in China, the company has been working with Ele.me, which is the country’s leading on-demand food delivery platform. Notably, the company’s delivery channel spans 2,000 stores across 30 cities in China. Starbucks has also partnered with Uber Eats for delivery in both Tokyo and Miami.

Starbucks is also focusing on three key areas, which includes expansion of the company’s loyalty program, digitalization and new member acquisition. These efforts are likely to drive comps higher. Furthermore, the company holds a leading position in digital, card, loyalty and mobile capabilities. Retail companies are witnessing a shift in consumer shopping behavior from bricks-and-mortar stores to online shopping.

These apart, Starbucks secured a leading position to leverage its mobile and digital assets, and loyalty and e-Commerce platforms for capitalizing on these trends and create more revenue streams. Undoubtedly, the company’s mobile app is now one of the most widely used mobile payment app in the United States. Mobile payments represented 14% of U.S. transactions in the fiscal fourth quarter. This initiative allows customers to order before arriving at a Starbucks café and pick up the items at their selected Starbucks store, thus saving time. The service is witnessing increased usage and proving to be a key growth driver as adoption continues to increase.

However, margin contraction has been a major concern for the company. In the first, second, third and fourth quarter of fiscal 2018, Starbucks non-GAAP operating margin shriveled 170, 80, 230 and 190 bps, respectively. The margin contraction in the recently reported quarter can be primarily attributed to an impact of investments associated with the U.S. tax law change, product mix shift largely toward food and planned partner.

Starbucks Corporation Price and EPS Surprise

Zacks Investment Research

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Written By: Zacks Investment Research