Starbucks Corporation will be announcing its fiscal first-quarter earnings on Thursday after the market closes.
Only a few companies can brag the iconic status that Starbucks has achieved. The coffee giant transformed the coffeehouse industry in the US, extended its reach across the globe and built its presence almost pervasive nationally.
Yet, as investors prepare for Starbucks' first-quarter results coming this January 26, some fret that the company might begin to have troubles maintaining its past growth rates indefinitely.
The stock has performed well, climbing 12% since mid-October.
A significant percentage of those gains came after Starbucks released its fiscal fourth-quarter and full-year results in early November. The coffeehouse giant stated that sales grew 16% for the quarter, driving a more than 25% gain in EPS. Operating margins soared by almost two full percentage points. Comparable sales jumped 4% globally.
In their fiscal fourth-quarter, Starbucks also opened 690 net new stores, bringing the store total to 25,085 in 75 countries. The said quarter also features a SSS raise of 4%, and an even higher 6% in China.
Yet Starbucks’ shares cratered in December when CEO Howard Schultz announced to step down from his position for a smaller role in the business this year. Current president and COO Kevin Johnson will take over the CEO role as of April 3, placing Schultz into the role of executive chairman of the board.
Several believe this will turn out to bite the company as it did almost a decade ago; some investors recalled the last time Schultz left the CEO spot, which took place in 2000 just as the overall stock market was moving towards a bear-market period. Yet Schultz will remain with the company, changing his job to monitor at innovation and the growth of the Starbucks Reserve high-end store concept and brand.
A renewed customer loyalty program earlier this year is also proving to be the most successful idea. Last April, Starbucks revamped its reward program which now rewards customers for every dollar spent instead of the number of visits, making it one of the most popular loyalty programs of any retail store. Starbucks also has launched popular mobile initiative, which touched 5% of US transactions in the last quarter.
What to expect in its earnings report
For earnings, analysts are projecting EPS between 52 and 53 cents, up from approximately 46 cents for the same period in 2016. For the last four quarters, Starbucks has surpassed analysts’ estimates. Meanwhile, the analysts’ consensus expects revenue at $5.85 billion, up from $5.37 billion in the previous year.
Starbucks also released a five-year plan that includes 10% revenue growth, thousands of new stores worldwide, and EPS growth of 15% to 20%.
Analysts will be particularly watching the coffee company’s US same-store sales result closely due to the fact that this would be the key driver in the stock’s direction.
Buckingham Research Group analysts said in a note published Tuesday, “The stock is fairly simple, in our opinion, and its direction is determined by the rate of same-store sales growth (mostly in the US), margins and earnings revisions. On these metrics, we see a decelerating trend, especially in the US same-store sales and see modest downside risk to earnings.”
“Mobile order and pay, remodels and drive-thru additions, beverage innovation and seasonal limited-time offers, and food continue to be cited as drivers, while cannibalization remains the primary reason for a decline in sales,” Wedbush analysts wrote in a note last week regarding the same-store sales. Analysts expect sales growth of roughly 4% based on its recent checks of 5% of US co-owned locations.
Analysts claimed the see continued same-store sales momentum, and anticipate continued category growth in US single-serve and bagged grocery, especially given the latest announcement from J.M. Smucker Co. that it will be hiking prices of packaged coffee brands.
Will Starbucks grow faster?
Investors have reined in their prospects about Starbucks earnings over the past few months. Most have slashed their views on first-quarter earnings by roughly 5%, and made small cuts to their expectations for fiscal 2017 and 2018.
Regarding the current CEO stepping down this coming April, freeing up Schultz to spend more time on a new direction for Starbucks could be the most ideal strategy to generate long-term future growth beyond the accomplishment of its current store base.
Despite the stir in management, Starbucks is still moving forward with grand expansion plans, particularly with the primary focus on China. The company has opened an estimated 1,000 locations in China over 2016, and sees doubling its existing count of almost 2,500 stores in the next four years in the country which has a drastically bigger population overall than the US.
In the Starbucks earnings report, the crucial question will be whether the coffee gargantuan is able to maintain the momentum it created in its November quarterly report and build on it going forward. Moreover, seeing more of Kevin Johnson's outlook for the company will be fundamental to boost confidence in his ability to step into Schultz's CEO role and bring Starbucks forward into a faster-growth future.
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