What 2 Starbucks Analysts See Brewing After Q3 Earnings

Following Starbucks Corp’s SBUX third-quarter earnings beat on Tuesday, July 27, analysts at Morgan Stanley and Cowen provided their key takeaways and future outlook.

Starbucks Q3 Earnings Recap

• EPS came in at $1.01, beating consensus estimates of 77 cents by 31%.
• Revenue came in at $7.5 billion, beating consensus estimates of $7.24 billion by 4%.
• Operating margins came in at 20.5%, beating consensus estimates of 18.4%.
• Fourth-quarter earnings are expected to be reported Oct. 28.

Related Link: Starbucks Says 25% Of All Q3 Milk-Based Beverage Sales Came From Dairy Alternatives

Morgan Stanley’s Take On Starbucks

Despite having a “stand-out quarter” carried by better than anticipated margins, macroeconomic risks make the company risky in the near- to midterm, analyst John Glass said in a Wednesday note.

American stores are performing well, yet the company’s China sales are far from impressive, the analyst said. Starbucks dropped its full-year China comp expectations from 27%-32% to 18%-20%, he said. 

The disappointment out of China was primarily due to COVID-19-related restrictions, which also harmed Japan sales, said Glass.

Inflationary pressures and the need to reinvest in labor and technology will add additional pain points to Starbucks’ bottom line, said the analyst.

Over the long term, Starbucks should be able to report double-digit EPS growth and emerge from the pandemic with a larger market share, he said.

The company’s margins are strong, and its digital sales and membership are becoming an increasingly significant contributor to revenue, said the Morgan Stanley analyst.

Glass revised his fourth-quarter and FY22 EPS estimates from $1.01 to $1.08 and $3.85 to $3.79, respectively. The analyst maintained an Equal-weight rating on Starbucks and increased the price target from $120 to $125.

Cowen’s Take On Starbucks

In contrast with Morgan Stanley’s negative outlook on international results, Cowen analyst Andrew Charles argues that Starbucks’ expansion should be viewed as a growth story.

Starbucks grew its My Starbucks Rewards (MSR) program membership by 4.5 million, said the analyst. Additionally, MSR now has 24.2 million active members, far higher than the pre-pandemic high of 19.4 million, he said. 

This is encouraging due to Starbucks’ “impressive data analytics and 1:1 marketing capabilities,” which are able to generate growth in same-store sales, Charles said. 

The analyst revised his 2021-2023 EPS estimates from $2.96, $3.60 and $4.12 to $3.23, $3.80 and $4.33.

The analyst maintained an Outperform rating on Starbucks and raised the price target from $126 to $135.

SBUX Price Action: Starbucks was down 2.76% to $122.55 at last check Wednesday