- Starbucks fell short of analysts’ expectations.
- The stock tanked, but there are positive takeaways.
- Long term investors would do well to take a small position and build on it slowly.
On April 21, beverage restaurant chain Starbucks (NASDAQ:SBUX) came out with its Q2 FY 2016 earnings. Revenue fell roughly by 0.8% to $4.99 billion, short of analysts’ estimates in the most recent quarter. Starbucks’ earnings per share (EPS) clocked in at $0.39, which is in line with estimates. Carnage ensued the following day with a 4.9% drop in Starbucks’ stock. Business oriented long-term investors say opportunity awaits us and here’s why.
Long-term investors should be delighted about the fact that the numbers indicate that more consumers enjoy returning to Starbucks’ established locations. Subsequently, consumers spend more while they are there. In the most recent quarter, comparable store sales expanded 6%, with ticket transactions up 4%, and customer traffic up 2%. In context, the traffic number compares unfavorably with 4% the increase exhibited in Q1 due to softening global macroeconomic conditions. An investor with a long-term outlook understands fluctuations occur in the macro economy over time. Traffic should strengthen as emerging and developing economies, such as China, get back on track.
A company can fall short of Wall Street estimates and still improve (and the opposite can be true as well). In the most recent quarter, Starbucks saw its revenue and net income improve 9% and 16%, respectively, YoY. Net profit margins improved to 11.5% versus 10.8% the same time last year. Revenue growth simply outpaced growth in expenses. The same thing happens when you expand the focus to year-to-date metrics. Starbucks’ year-to-date revenue and net income increased 11% and 16%, respectively, YoY (when factoring out an extraordinary gain from last year for net income).
Investor concerns over changes in Starbucks’ rewards programs are quite legitimate. Investors who think like business owners don’t want unhappy customers. In the most recent earnings call, Starbucks’ management repeatedly assured stakeholders that the new rewards program shows positive reception. Moreover, management emphasized how the rewards program incentivizes “frequency and overall spend”. However, one executive remarked on some potential “bumpiness” in regards to the new rewards program, alluding to the possibility of some customers feeling slighted. Overall, I think the quality Starbucks experience will survive this relatively small change over the long-term. The company doesn’t believe in resting on its laurels.
In their typical public relations zeal, Starbucks’ management exhibited an entrepreneurial drive to move forward. They were quick in pointing out the company’s new partnership with Nestle SA (OTC:NSRGY) to produce new pods for its espresso machines, enabling international expansion in the single serve market. Moreover, management talked about a Starbucks Reserve premium brand. Starbucks’ management also seems upbeat about untapped potential in China. They feel that they are just getting started in that country.
The entrepreneurial drive to succeed should make the long-term investor smile. This serves as the cultural DNA to come up with new products, expand into new territories and experiment with potentially positive experiences with customers. Ultimately Starbucks’ efforts could lead to superior fundamental growth and, consequently, superior total shareholder return. Of course, the stock market understands this potential as well, assigning a P/E ratio of 36 to Starbucks’ stock versus 24 for the S&P 500. However, prospective investors should at least take a small position while buying more during corrections like the one seen the day after the earnings release.