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Starbucks earnings preview: COVID-19 stalls sales recovery, but spring is looking up

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Starbucks Corp.
has already given guidance for its first fiscal quarter and the full year, but analysts are still looking forward to the coffee company’s coming earnings announcement, scheduled for Jan. 26 after the closing bell, in order to gain visibility about the company’s COVID-19 recovery path.

Starbucks is guiding for first-quarter earnings per share in the range of 32 cents to 37 cents, and adjusted EPS of 50 cents to 55 cents. For fiscal 2021, the company is guiding for EPS in the range of $2.34 to $2.54, and adjusted EPS in the range of $2.70 to $2.90.

“Given the recent disclosure, we expect focus to be on any fiscal second quarter to-date trends, though we expect management to continue to point to a U.S. [comparable sales] recovery by the end of the current quarter, in part due to difficult January and February 2020 comparisons,” wrote RBC Capital Markets in a restaurants note published on Thursday.

RBC has an outperform rating on Starbucks shares.

Starbucks, like many other businesses, has been hit by
surging COVID-19 numbers, driving investors to look further down the line for
signs of recovery.

Read: Starbucks says cold beverages have driven more than $1 billion in sales over the last three years

And: U.S. suffers another 4,000 deaths in a single day as experts welcome Fauci’s return to White House podium

“While retrenching same-store sales in November and December
is not unique to Starbucks, investors appear to be looking past the near-term
challenges for nearly every concept to brighter days ahead in the spring of
2021,” wrote BTIG analysts led by Peter Saleh in a December note following the
company’s investor day event.

“While we expect Starbucks to make a full recovery once the vaccine is widely available, we don’t see a same-store-sales catalyst for the next couple of months.”

BTIG rates Starbucks stock neutral.

One of things that could spark sales is the return of Starbucks’ “Happy Hour” event.

“The company recently suspended its Happy Hour promotion to protect workers in the current environment, but its reintroduction next quarter could prove to be a meaningful sales driver,” wrote Stifel analysts in a Dec. 16 note.

Stifel rates Starbucks shares buy with a $115 price target.

Starbucks has an average overweight stock rating among the 34 analysts polled by FactSet. Analysts have an average price target of $109.40 for Starbucks shares.

Here’s what to watch for during Starbucks’ earnings report:

Earnings: The FactSet consensus is for EPS of 55 cents, down from 79 cents last year.

Estimize, which crowdsources estimates from sell-side and
buy-side analysts, hedge-fund managers, executives, academics and others, is
forecasting EPS of 59 cents.

Starbucks has beat the FactSet EPS consensus in five of the last six quarters.

Revenue: The FactSet consensus calls for revenue of $6.9 billion, down from $7.1 billion last year. Estimize forecasts revenue of $6.96 billion.

Stock price: Starbucks shares have gained 12.1% over the last year, and 16% over the past three months.

The benchmark S&P 500 index
is up 15.7% over the past year.

Also: Grocery sales soared in 2020 due to COVID-19, but analysts forecast a 2021 crash back to Earth

Other items:

• Starbucks operations in China have largely bounced back. “China has recovered quickly, driven by holistic and calibrated measures, which were led by local health authorities,” said John Culver, Starbucks’ international group president of channel development and global coffee, tea and cocoa, during the December investor event, according to a FactSet transcript.

“China’s economy has seen a strong recovery as consumer behaviors have returned to pre-pandemic levels and retail sales have steadily grown since August.”

Stifel highlights where the China recovery is lacking: “Interestingly, in light of reports of the Chinese economy recovering, management noted the portion of the business left to be recovered is that generated from international travel for both business and tourism,” Stifel said.

“To that end, the team in China is working to replace those
transactions, and sales in the country have accelerated in December from

UBS analysts say digital is one of the factors that will
continue to benefit growth in China.

“Digital engagement continues to improve relative to peers (app downloads and usage data inside) supporting future sales strength, while Starbucks Now store development and Alibaba partnership should support those improved trends,” analysts led by Dennis Geiger wrote.

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The Starbucks Now format is focused on delivery and the use of “mobile order & pay” for customers to digitally order and pickup their food and beverages.

UBS rates Starbucks shares neutral with a price target of

• Digital is important elsewhere as well. “As QSRs [quick-service restaurants] accelerate investment in digital strategies as a result of COVID-19 impacts, Starbucks is likely to continue innovating to maintain its leading position,” UBS said.

Starbucks had 19.3 million members in its digital loyalty
program at the end of the fourth quarter, the company said during its investor
event. Those customers drive half of the company’s revenue.

“We’re already seeing strong new membership resulting from
our Stars for Everyone enhancements that gives members more ways to pay and
earn Stars building on the outstanding momentum we have with our digital
flywheel,” said Roz Brewer, Starbucks’ chief operating officer, during the
investor event, according to FactSet.

“As more customers adopt our app and reap the rewards, we
fully expect higher levels of engagement going forward. This makes us incredibly
optimistic about member growth for fiscal 2021 and beyond.”

• A minimum-wage hike could be a factor going forward. Wedbush analysts note the impact that the Democratic-led U.S. government could have on the restaurant sector, specifically with the chance of a minimum wage hike to $15.

See: Yellen says raising minimum wage to $15 would have ‘minimal’ impact on jobs, but nonpartisan Congressional Budget Office disagrees

The Wedbush note is focused on casual-dining chains where tips and wages below the minimum are commonplace, but wage costs could have an impact on Starbucks as well.

“We also recently shared one of our biggest wage investments of at least a 10% pay increase for our partners, all of whom already earn more than the minimum wage,” wrote Starbucks Chief Executive Kevin Johnson in a memo posted to the Starbucks website in December.

Watch: Value or growth stocks? What sectors to watch in 2021

“With these investments, more than 30% of our U.S. retail partners are currently at or above $15 per hour and we continue on our path to ensure all U.S. partners will be making at or above $15 per hour within the coming two to three years.”

MKM Partners is watching for the impact on margins.

“Along with sales, margin strength stays in focus, during
this fluid situation, as leveraging fixed costs and the benefits of its
investments in logistics, should continue to be necessary to overcome the
P&L challenges on the wage front (traditional increases/inflation and
mandated changes),” analysts wrote.

MKM rates Starbucks shares neutral with a fair-value estimate of $104.

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