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Will Starbucks’ share price remain piping hot?

After releasing its earnings report on 28 January, Starbucks [SBUX] shares were down 3% in intraday trading the following day. The stock had gained 4.6% in first 24 days of January, before beginning to slide. In 2019, shares in the coffee chain grew 39%, outperforming the S&P 500’s 29% climb in the same period of time.

What happened? Despite issuing some positive Q1 fiscal 2020 results, Starbucks warned of the potential impact that the coronavirus could have on its next quarter. “The magnitude of the impact will depend on the duration of store closures as we work with local authorities to manage the situation and protect our partners and customers,” CFO Pat Grismer told analysts and shareholders on the call.

The company has so far closed half of its stores in China and halted delivery for locations in the Hubei province but will continue to monitor the situation.

Under its Q4 2019 forecast, Starbucks expects fiscal 2020 revenue to rise between 6% and 8%, and global same-store sales growth to be in a range of 3% to 4%. The company said that it will update its guidance for fiscal 2020 when it can gauge a “reasonable estimate” of the deadly virus’s impact.   

 

 

 

 

Liquid capital

Starbucks’ Q1 results for fiscal year 2020 topped analysts’ earnings expectations, with non-GAAP EPS rising 5% year-over-year to $0.74 per share, or $885.7m, compared to the $0.76 estimated by analysts at Refinitiv.

The analysts had also forecasted a 7% year-over-year increase in revenue to $7.1bn for the quarter, which was in line with estimates. Furthermore, Starbucks managed to just top their estimates for global same-store sales of 4.4%, by posting a 5% jump.  

$7.1billion

Starbucks' revenue for Q1

  

The jump was driven by a 3% increase in average ticket, also known as the metric for sales per customer, and a 2% increase in comparable transactions. This growth could also be pegged on the company’s opening of 539 new stores during the quarter, which brings its total footprint to 31,795 stores. It expects to add an additional 2,000 new locations worldwide in 2020.

Looking at the company’s sales geographically, US same-store sales jumped by 6% during the quarter, boosted by new products such as its seasonal drinks range and the 1.4 million additional customers joining its loyalty programme.

While rival Luckin Coffee [LK] recently surpassed Starbucks as the largest coffee chain in China, sales across the region increased by 6%. Mobile orders accounted for 15% of its total revenue in the region, revealing an increase of 10% from the previous quarter, reaffirming that its delivery partnership with Alibaba [BABA] continues to pay dividends.

 

Market Cap$99.59bn
PE ratio (TTM)29.05
EPS (TTM)2.92
Operating Margin (TTM)14.77%

Starbucks share price vitals, Yahoo Finance, 03 February 2020

 

Growth in China in question

In its Q4 fiscal year 2019 report, Starbucks noted that same-store sales were particularly impactful, as it attracted more customers in China than expected. Same-store sales in China had increased by 4% in the previous quarter, compared to the 3% growth in international sales.

Zacks had previously noted that the company’s results were likely to benefit from expansions in China. However, as events in China related to the recent coronavirus outbreak unfold, these projections could change.

“We remain optimistic and committed to the long-term opportunity in China, building on our brand heritage and 20-year legacy of profitable growth,” CEO Kevin Johnson reassured in the company’s report.

“We remain optimistic and committed to the long-term opportunity in China, building on our brand heritage and 20-year legacy of profitable growth” - Starbucks CEO Kevin Johnson

 

As of Tuesday’s (28 January) close of $88.60, shares in Starbucks were around 12% off its 52-week high of $99.72, which it achieved in July last year. The consensus rating among 30 analysts polled by CNN rate the stock a hold, with 17 analysts rating the stock as such and 13 a buy. The current median price target among 25 analysts is $95, representing a 7% uptick from Tuesday’s close.

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