Starbucks Corporation SBUX reported impressive third-quarter fiscal 2018 results, wherein both top and bottom line surpassed the Zacks Consensus Estimate. Results benefited from the Americas segment’s improved performance, store opening over a year’s time and ownership change in the East China business.

Despite robust quarterly numbers, shares of the company witnessed a marginal gain of 0.6% in after-hour trading on Jul 26 as investors seems to be disappointed with the comparable sales decline in China.

Earnings, Sales & Comps Discussion

Adjusted earnings per share of 62 cents surpassed the consensus mark of 60 cents and also grew 13% on a year-over-year basis.

Total sales came in at $6.3 billion, which outpaced the consensus estimate of $6.26 billion and increased 11% from the year-ago level. The upside was driven by robust new store performance, comparable sales growth, favorable impact of foreign currency exchange rate, and consolidation of the company’s East China business. Meanwhile, excluding the impact of foreign currency and streamlining activities, sales were up 7%.

Global comparable store sales increased 1% compared with 2% registered in the second-quarter fiscal 2018. Average ticket increased 3%, flat sequentially. However, transactions decreased by 2% compared with a decline of 1% in the preceding quarter. Notably, in the second quarter, Starbucks opened 511 net new stores worldwide, bringing the total store count to 28,720 across 77 markets. It plans to build 600 net new stores annually in Mainland China, which will double the market’s store count to 6,000 across 230 cities from the figure at fiscal 2017 end.

Margin Down

On a non-GAAP basis, operating margin contracted 230 basis points (bps) year over year to 18.5%. The decline can be attributed to an impact of 130 basis points from investments associated with the U.S. tax law change, product mix shift largely toward food and planned partner. Rise in cost due to investment in digitalization also dented the company’s operating margin. Also, higher spending in its store partners (employees) along with the impact of its ownership change in the East China business added to the woes. On a GAAP basis, operating margin declined 190 bps to 16.5%.

Starbucks Corporation Price, Consensus and EPS Surprise

Americas: Net sales at this flagship segment were up 6% year over year to $4.2 billion.

Comps rise of 2% in the quarter (same as the preceding quarter) comprised a 3% increase in average ticket. U.S. comps also grew 1% compared with 2% registered in second-quarter fiscal 2018.

Impressively, this is third consecutive quarter of 2% comps growth in Americas, mirroring concerns that its increased promotions somehow failed to attract a huge number of customers.

Food comps were up 1%, which  has been consistently contributing 1-2% comps growth for many years now. Meanwhile, core beverage, which includes espresso, tea and refreshers, reported 2% growth. However, U.S comps were negatively impacted by weaker- than-expected blended sales.
Also, membership increased 14% year over year to 15.1 million in the My Starbucks Rewards (MSR) program. Currently, customers in the United States are using the chain’s mobile app to order and pay for their drinks and joining its rewards program. Mobile payments represented 13% of U.S. transactions.

However, operating margin in the segment contracted 290 bps to 21.5% due to the impact of a food-related mix shift, higher spending in its store partners and the impact related to May 29th anti-bias training for U.S. partners.

China-Asia-Pacific (CAP): Net sales were up 46% to $1.23 billion. The upside was driven by increased sales from the acquisition of east China operations, 746 new store openings over the past 12 months, partially overshowed by decline in comparable store sales.

Comps were down 1% compared with 3% growth registered in second-quarter fiscal 2018. Decline in comps can be primarily attributed to 2% decline in comps from China. In the preceding quarter, China posted impressive comps growth of 4%.

However, operating margin at the CAP segment contracted 760 bps year over year to 19% in the quarter due to the impact of its ownership change in the East China business.

Europe, Middle East and Africa (EMEA): Net sales improved 10% year over year at $275.4 million in the segment. The uptick was prompted by higher sales from the addition of new stores and a positive currency effect.

That said, comps remained flat year over year (against a 1% decline in the preceding quarter). Operating margin expanded 880 bps to 12.7%.

Channel Development: Net sales increased 6% to $509 million. The improvement was driven by higher sales of premium single-serve products, packaged coffee as well as foodservice and international channels.

Nevertheless, operating margin contracted 210 bps to 41.8%.

All-Other: The segment comprises Seattle’s Best Coffee, Starbucks Reserve Coffee and Roastery businesses, and Teavana-branded stores. Sales at this division decreased 34% to $66.3 million.

Fiscal 2018 Guidance

Starbucks now anticipates global comps growth to be marginally below its earlier guided range of 3-5%. Globally, the company still expects to add approximately 2,300 net new stores. Consolidated revenue growth is projected to be in high-single digits.

GAAP EPS is envisioned in the range of $3.26-$3.28 compared with $3.32-$3.36 guided earlier. Non-GAAP EPS is expected in the band of $2.40-$2.42 compared with $2.48-$2.53 expected earlier.

Zacks Rank

Starbucks carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include Dave & Buster’s Entertainment, Inc. PLAY, BJ’s Restaurants, Inc. BJRI and Chipotle Mexican Grill, Inc. CMG. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dave & Buster’s Entertainment has an impressive long-term earnings growth rate of 14.8%.

BJ’s Restaurants reported better-than-expected earnings in the trailing two quarters.

Chipotle Mexican Grill has an impressive long-term earnings growth rate of 17%.

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