Starbucks' Q3 Earnings Meet Estimates, Revenues Lag

Starbucks Corporation SBUX reported third-quarter fiscal 2024 results, wherein earnings met the Zacks Consensus Estimate but revenues missed the same.

Despite reporting not-so-impressive results, the company's shares rose 3.6% in the after-hours trading session on Jul 30. Investor sentiment regarding SBUX received a boost after its CEO, Laxman Narasimhan, said that the company's three-part action plan is starting to show positive results, leading to operational improvements that should boost financial performance.

Narasimhan also highlighted that the company's increasingly innovative and persistent approach is strengthening its abilities and steering SBUX back toward sustainable growth.

Discussion on Earnings, Revenues & Comps

In the fiscal third quarter, the company reported adjusted earnings per share of 93 cents, in line with the Zacks Consensus Estimate. The bottom line decreased 7% year over year from $1.00.

Quarterly revenues of $9,113.9 million missed the Zacks Consensus Estimate of $9,224 million. The top line declined 0.6% on a year-over-year basis, due to dismal international revenues.

Global comparable store sales declined 3% year over year. The downside was backed by a decrease of 5% in comparable transactions, partially overshadowed by a 2% increase in average tickets.

In the fiscal third quarter, Starbucks opened 526 net new stores worldwide, bringing the total store count to 39,477.

Overall Margin Contracts in Q3

On a non-GAAP basis, the operating margin was 16.7%, which contracted 70 basis points (bps) from the prior-year quarter's level. The decrease was caused by several factors, including increased costs due to investments in employee wages and benefits and intensified promotional efforts. However, some of these losses were mitigated by pricing adjustments and improved operational efficiencies in stores.

Segmental Details

Starbucks has three reportable operating segments — North America, International and Channel Development.

North America: In the fiscal third quarter, segmental net revenues were $6.8 billion, up 1% year over year. The segment's comparable store sales declined 2% against 7% growth in the prior-year quarter. Average transactions declined 6%, whereas change in tickets rose 3% year over year.

Operating margin was 21% compared with 21.7% in the prior-year quarter. The negative impact stemmed from a combination of deleverage, additional investments in store partner compensation and benefits, heightened promotional efforts.

International: Segmental net revenues of $1.84 billion declined 7% year over year. The segment's comparable store sales declined 7% year over year, owing to 3% and 4% decline in transactions and ticket, respectively.

Operating margin contracted 340 bps year over year to 15.6%. The downside was due to investments in store partner wages, benefits and promotional activities and strategic investments.

In the fiscal third quarter, comps in China dropped 14% year over year, against  growth of 46% in the prior-year quarter. A 7% decline in transactions and tickets each hurt the company's performance in China.

Channel Development: Net revenues in the segment fell 2% year over year to $438.3 million. The dismal performance was due to a decline in revenues in the Global Coffee Alliance.

In the quarter, the segment's operating margin expanded 740 bps year over year to 53.7%. This was attributed to a change in the sales mix, reduced product costs from the Global Coffee Alliance and strong income from our North American Coffee Partnership joint venture.

Financial Details

The company ended the fiscal third quarter with cash and cash equivalents of $3.2 billion compared with $3.6 billion as of Oct 1, 2023. In Jun 30, long-term debt totaled $15.6 billion compared with $13.5 billion as of Oct 1, 2023.

Meanwhile, management declared a quarterly cash dividend of 57 cents per share. The dividend is payable on Aug 30 to its shareholders of record as of Aug 17.

Other Updates

The Starbucks Rewards loyalty program's 90-day active members in the United States increased to 33.8 million, up 7% year over year.

2024 Guidance

The company reaffirmed its fiscal 2024 guidance. In fiscal 2024, the company continues to anticipate global revenue growth of low single digits. Full-year global and the U.S. comp growth is forecast to be in the range of low single-digit decline to flat. The company anticipates China's comp to decline 12% year over year.

Management forecasts global net store growth to be 6%. In fiscal 2024, GAAP and non-GAAP EPS earnings per share are expected to improve in the range of flat to low single digits.

Zacks Rank & Key Picks

Starbucks currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Retail – Restaurants industry are:

Brinker International, Inc. EAT flaunts a Zacks Rank #1 (Strong Buy) at present.

It has a trailing four-quarter earnings surprise of 213.4%, on average. EAT's shares have surged 74.3% in the past year. The Zacks Consensus Estimate for EAT's 2024 sales and EPS indicates 5.5% and 46.6% growth, respectively, from year-earlier actuals.

Texas Roadhouse, Inc. TXRH currently sports a Zacks Rank #1. TXRH has a long-term earnings growth rate of 17.5%. Shares of TXRH have gained 57.3% in the past year.

The Zacks Consensus Estimate for TXRH's 2024 sales and EPS indicates a rise of 15.6% and 39.7%, respectively, from the year-ago period's levels.

The Cheesecake Factory Incorporated CAKE flaunts a Zacks Rank #1 at present. CAKE has a trailing four-quarter earnings surprise of 6.4%, on average. The stock has risen 8.1% in the past year.

The Zacks Consensus Estimate for CAKE's 2024 sales and EPS implies growth of 4.8% and 17.8%, respectively, from the year-ago period's level.

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