Starbucks Corporation

Stock Details

Mixed Performance in the Second Quarter of 2019: Starbucks Corporation (NASDAQ: SBUX) is a leading company engaged with retailing of specialty coffee in the world. As per the Annual Report 2018, Company-operated stores accounted for 52% of the total revenue whereas remaining 48% represented the Licensed stores.

Key Highlights of Second Quarter 2019: SBUX, for 2QFY19, posted mixed set of numbers with net income of $663.2 million as compared to $660.1 million on pcp. Adjusted earnings per share stood at 60 cents for the period. Adjusted revenue growth witnessed a growth of 9% to $6.31 billion in the period. Non-GAAP operating margin contracted by 40 basis points to 15.8%. However, by adjusting Streamline-related activities, non-GAAP operating margin saw an increase of ~40 bps. Additionally, during the quarter, SBUX posted a rise of 3% in the same store sales. The company, during the quarter, opened new 319 stores, which was up 7% on pcp, to 30,184 stores. 94% of the stores have been opened outside U.S.


Second Quarter 2019 Financial Highlights (Source: Company Reports)

On Segment wise front, during the quarter, Americas segment saw revenues of $4.3 billion with operating margin expanding by 80 basis point to 20.9%. The company reported a 9% rise in the revenue of China/Asia Pacific segment to $1.29 billion and its operating margin also expanded by 80 bps to 18%. However, there was a decline of 9% in the revenue from EMEA segment. The revenue from Channel Development segment fell 21% to $446.6 million. Moreover, during the second quarter 2019, SBUX Starbucks Rewards program has added one million members in China to 8.3 million.

Capital Management: In March, SBUX had started the new share purchase plan of $2 billion, which was anticipated to get completed by the end of June 2019. Overall, the company had returned $3.2 billion to its shareholders in the second quarter through both, share repurchases and dividends.

Outlook for FY19: SBUX has raised the earnings estimates for FY19 on the back of increase in the tax benefits and strong performance of the company in the first half. The company now expects the 2019 non-GAAP earnings per share to be in the range of $2.75 to $2.79. This range has been raised from a previous expectation of non-GAAP earnings per share range of $2.68 to $2.73. The mid-point of the newly forecasted range reflects an increase of 14% as compared to pcp.

Moreover, for FY19, the operating margin is expected to fall slightly compared to FY18. Although the company expects improvement in America’s operating margin compared to last year but there will be a decline in the margin due to development of the channel (expected to be mid-30%) due to change in sales mix and company’s investment in the Siren retail. The company expects 2019 non-GAAP effective tax rate to range between 19% and 21%. The company has reaffirmed the 2019 G&A as a percentage of system sales guidance and expects it to be reduced by 100 basis points in three years. Non-GAAP G&A is projected to reach approximately $1.7B for FY2021.

Stock Recommendation: The third quarter result for fiscal year 2019 is scheduled to be announced on 26 July 2019.  At current market price of $89.77, the stock is trading at a higher price to earnings multiple of 38.86x as compared to 10x of its industry median. On EV/EBITDA front, the stock is available at EV/EBITDA multiple of 20x, significantly higher compared to 8.9x of its industry median. The stock has witnessed a substantial gain of ~78% in last 1-year. Currently, the stock is trading closer to its 52-week high of $89.82, and the above-mentioned multiples indicate for stretched valuations. Hence, we suggest that investors can book profits as we recommend a “Sell” rating on the stock at the market price of $89.77, up 0.79% as on 12 July 2019.

 
SBUX Daily Chart (Source: Thomson Reuters) 

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