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Starbucks (SBUX) Earnings: Here’s What We Should Expect

January 24, 2019

 

Starbucks (SBUX) will be reporting its earnings for the 2019 fiscal first quarter ending December 31, 2018 after the market closes today. This report is highly anticipated, as it will point the way to answering this basic question: Is Starbucks a growth business or is it turning into a cash cow?

The difference will weigh on the stock’s valuation and determine whether the market is willing to bid up the price-to-book and price-to-sales ratios.

Right now, given the light-nature of the company’s assets, the price-to-book ratio is a whopping 74.33. And on a price-to-sales basis, the company sports a more reasonable ratio of 3.70. But with the dividend at a stingy 2.17%—despite raising the distribution by an average of 24.29% over the past five years—and a payout ratio of 39.00%, investors in this company need to see more growth or more income to justify buying and owning it.

So far this year, with the broader stock market generally recovering some of its recent losses, the shares are up 3.11%, which lags the S&P 500’s gain of 4.80%. Even more telling is that the stock is also trailing the S&P Consumer Discretionary Index’s gain of 6.35%.

That recent underperformance distracts from the stock’s trailing year outperformance—a total return of 10.18% against the S&P 500’s drop of 7.39% and a drop in the S&P Consumer Discretionary Index of 3.09%.

The fiscal first quarter is very important for Starbucks. Like other retailers, the quarter’s performance is dependent on holiday spending, as folks were out and about and hopefully spending more on coffee, other seasonal beverages and food items.

Analysts expect that same-store sales will come in with a gain of 2.80%, which is above the reading of 2.00% for the same quarter last year.

In the crucial US market, that sales gain should be a positive 3.20%. But the other key market where growth is being pitched is in China. Same-store sales gains in China should be softer and come in closer to 1.00%.

This is due to the rapid rollout of new stores, which led to 585 additional stores in 17 cities around China in fiscal 2018. The additional stores are expected to cannibalize some neighboring stores, much like what happened in some US markets where, for a while, it seemed there were almost too many stores in some local neighborhoods.

The other bits to watch for are cost controls, as part of the streamlining effort of the new-ish management includes reducing general and administrative costs and expenses.

Right now, by my calculations, the operating income should see a modest pick-up over the same quarter last year. But margins are getting a bit of a squeeze on the ramp-up in wages and related employee costs.

In addition, the company has been deploying capital to increase delivery services throughout its networks of stores in the US, select European cities and via Alibaba (BABA) in China.

There are some other items that I’ll be looking at as well, including the coffee-product coop with Nestle (NSRGY) for its packaged goods and its digital data and payments programs for its regular customer base.

We should also get a better look at the change in accounting rules under the Financial Accounting Standards Board (FASB) and the change in revenue recognition under rule ASC606 for unredeemed gift card balances, also known as “breakage revenue.” The rule allows some speed-up in revenue recognition, which could be used to puff-up the quarterly numbers.

Investors expect a lot of this company—particularly for this quarter. A warm-ish set of numbers won’t cut it. And if there are any signs of challenges, we could see a pullback in the stock. Given the softer Chinese economy, blaming those challenges on slowed consumer spending growth won’t be an accepted excuse.

I like the company, many of its products (excluding its food items) and the stock. But I would prefer a greater focus on costs and a bigger payout of dividend distributions. I’ll be looking at the report to get a better handle on management’s direction for the company and how the stock should be valued.

For now, I’m still maintaining my recommendation for Starbucks.