- Starbucks' EBIT margins are expected to grow to 20.6% despite investment being elevated at present.
- Hitting $0.49 EPS on revenues of $5.34 billion would be good for Starbucks as its new loyalty program is expected to be disruptive.
- Usage of the mobile app is growing by leaps and bounds and will continue to increase repeat business going forward.
Starbucks Corporation (NASDAQ:SBUX) will announce its fiscal third-quarter earnings after the market close on the 21st of this month and investors will be tuning in with interest. Why? Well, in the previous quarter, Starbucks reported revenues of $4.99 billion which although was almost a 10% increase over Q2-2016 came in lower than what was initially projected. As a result, Starbucks Corporation share price still hasn't recovered to the $61+ levels set in April.
Furthermore, the share price suffered because Starbucks gave worrying guidance over the near term, stating that the newly structured loyalty program may affect its numbers to some extent. However, the lower this stock goes in the face of rising earnings, the more you are going to see smart money buy into the stock. Analysts are predicting earnings per share of $0.49 on revenues of $5.34 billion in fiscal Q3 which is a full $0.08 higher in EPS and $460 million more in top line revenues. Even if Starbucks misses estimates by a small margin (and guidance is not overhauled), I still like this stock from the long end for a number of reasons.
Firstly, although the company is stating that same store sales will come under pressure in Q3 due to restructuring of the loyalty program, EBIT margins are expected to continue to expand. This is where investors can really make good investment decisions - by delving into more fundamentals and not just earnings and sales growth. Analysts are actually expecting EBIT margins to grow to 20.6% in the third fiscal quarter which would be a 1.1% increase from the quarter of 12 months prior. Furthermore, Starbucks has been able to grow its margins in the face of operating and digital costs plus also increased compensation.
This is the benefit of volume and a $83 billion market cap company. Economies of scale such as new stores combined with better commodity pricing all come into play here because of the sheer size of the operation. In fact, 455 new stores were expected to have been added in the third quarter which should definitely impact revenue numbers. However, if revenues don't come in as expected, watch margin levels plus guidance going forward. The recent price increase will help but I will be watching out for how management feels its digital investment will impact its loyalty program and when will near term potential disruption subside? Remember margins are still rising with investment being elevated so I wouldn't be surprised if after earnings, analysts guide for a higher EBIT than 20% for fiscal 2016.
Apart from basic sales leverage (which is an increase in the volume of stores), investors will obviously be mindful of same store sales growth which is expected to grow by 5.8% in the company's fiscal third quarter. This is a figure Wall Street live and die by and one of the main reasons why Starbucks stock has suffered a pullback in recent quarters due to down trending growth levels (see chart)
However, the multinational has really made inroads in the digital revolution that is currently taking place in this sector. The days of seeing large queues in restaurants and fast food joints will soon be long gone as online ordering before collection will become the norm. The company's mobile app is growing by leaps and bounds and will definitely help same-store sales growth levels going forward. Investors will be looking to at the growth rates of transactions in Q3 to see if there is an underlying trend here. When you combine the company's excellent mobile app with its loyalty program, the opportunity is definitely there to open up a brand new income stream. Furthermore, if investors see that elevated investment is paying off in stellar growth, this again may put a floor under the stock price.
Any guidance on emerging markets and its recent deals with Keurig Green Mountain and Nestle will definitely be watched with interest. Internationally, for example, the franchise model is booming which again is perfect for rapid scale and margins. The franchising route is the route which both Coca Cola (NYSE:KO) and McDonalds (NYSE:MCD) have adopted in recent years and it has been paying off. Its less cash heavy and gives the franchisees far more leeway into how to run their businesses. Starbucks has decided to go big on China not just from a coffee shop perspective but also with other products such as Teavana. The competition may not concentrate on these markets (as they are really small compared to the US) but investors will which will make earnings interesting.
To sum up, Starbucks will announce its fiscal third quarter earnings after the market closes on the 21st and expectations are not overly bullish due to mixed guidance with respect to its reward program at the end of Q2. Nevertheless, Starbucks is at the cutting edge in this industry, on the digital front and any teething problems with the switch to the new program are sure to be temporary. Aside from the top and bottom lines, watch for margins, same-store growth and obviously forward looking guidance. Any pullback in the stock price should be bought in my opinion.