Analysis: SBUX

Starbucks (SBUX) reported better-than-expected results with its fiscal fourth-quarter 2020 earnings. Total net revenues of $6.2 billion (-8% YoY) edged the $6.06 billion consensus, and adjusted earnings per share of 51 cents (-27% YoY) handily exceeded estimates of 31 cents.

"I am very pleased with our strong finish to fiscal 2020, underpinned by a faster-than-expected recovery in our two lead growth markets, the U.S. and China. These results demonstrate the continued strength and relevance of our brand, the effectiveness of the actions we've taken to adapt to meaningful changes in consumer behavior and the extraordinary efforts of our green apron partners to serve our customers and communities in challenging circumstances," president and CEO Kevin Johnson said in the press release. "The guiding principles we established at the onset of the pandemic, combined with our industry-leading digital platform and our ability to innovate rapidly, continue to fuel our recovery and provide confidence in a robust operating outlook for fiscal 2021. Our strategies are working and I am optimistic that we will emerge from the Covid-19 pandemic as a stronger and more resilient company."

And confidence, resilience, and optimism were the three words Johnson wanted people to have following his conference call. Here is how he explained:

"First, in the most dynamic of times, Starbucks is consistently executing. Our recovery is progressing extremely well, as evidenced by better-than-expected sales and profits in the fourth quarter, which gives us great confidence going forward." 

"Second, we have accelerated several growth strategies and are innovating rapidly to adapt to new customer behaviors and preferences, building a new level of resilience for the future."

"And third, Starbucks partners have risen to the occasion, which, coupled with an innovation agenda that elevates the customer experience, introduces exciting new beverages and extends our digital customer relationships, leaves us very well positioned and gives me a tremendous sense of optimism for fiscal '21 and the future of the Starbucks Coffee Company."

Some broader highlights are that global comparable stores fell 9% in fiscal Q4, slightly better than expectations of an 11.7% drop. Driving the result was a 23% decrease in comparable transactions, partially offset by a 17% increase in average ticket. This is continued theme from prior results in that transactions volumes are lower, but the average ticket is for more product. This is a result of customers making "Starbucks runs," meaning group orders on a single ticket, instead of multiple people visiting the store.

Despite the pandemic, Starbucks accelerated the amount of net new stores opened in the quarter to 480. The company ended the quarter 32,660 stores globally and about 51% are company operated. It's also worth noting that the U.S. and China make up about 61% of the company's global portfolio. We bring this up, because Starbucks' exposure to Europe and the region's recent announced lockdown measures should be minimal.

By region, the Americas and United States reported a comparable store-sales decline of 9% YoY, a result that was better than expectations of a 12% fall, as a 25% decline in transactions more than offset a 21% increase in ticket size.

Specific to the United States, management highlighted that recovery trends improved faster than anticipated with comps down 4% in September, compared to -65% at the height of the pandemic some five months ago. Starbucks continues to see increases in mobile orders, which at up 25% in Q4 represents a strong growth from 18% in Q4, driven by continued improvements to the Starbucks mobile app as well as an increased messaging across our marketing channels to drive further awareness. It's also worth pointing out that the Starbucks rewards loyalty program 90-day active members in the U.S. increased to 19.3 million, up 10% year-over-year. Also, the Starbucks Reward program as a whole drove 47% of U.S. company-operated tender for a second consecutive quarter.

Net revenues for the Americas segment was $4.233 billion, -9% YoY and slightly better than expectations $4.147 billion. Operating income and margins remained challenged, but greatly improved from the prior quarter trough, as Starbucks reported $510.3 million in operating income (-46% YoY) at a margin of 12.1% (-810 basis points year over year). This decline in margin was primarily due to expenses and sales deleverage.

International comparable store sales fell 10%, compared with estimates of a 11.3% slide. A 15% drop in transactions was partially offset by a 7% increase in average ticket.

Specifically in China, comparable store sales fell by just 3% YoY, an improvement from the prior quarter's 19% decline, with comparable transaction down 7%, slightly offset by a 5% increase in average ticket. Starbucks continues to see great traction with mobile ordering and store pickup. Additionally, 90-day active members increased 36% sequentially to 13.5 million, representing 34% growth over the prior year.

Revenues in the segment came in at about $1.492 billion, down 5% YoY and slightly below estimates for $1.5 billion. Operating income (+179.5 million) and margins (+12%) recovered closer to prior year's levels ($262.7 million and 16.7%, respectively) but still have ways to go.

And in Starbucks' Channel Development Segment, revenues fell 9% YoY to $464 million, slightly beating estimates for $456 million. Unlike Starbucks' traditional operations, channel's sales are derived from grocery stores, mass merchants. The decline in sales from this segment was primarily due to an 8% unfavorable impact of Global Coffee Alliance transition-related activities, including a structural change to Starbucks' single-serve business, as well as some impacts related to Covid-19 on food service businesses. But at-home coffee and ready-to-drink products provided an offset. Meanwhile, operating margins increased 510 basis points to 42.7%, primarily due to a business mix shift driven by strength in ready-to-drink products and the structural change in single serve.

On the capital allocation front, management reiterated its commitment to the dividend, and the company recently increased the quarterly payment by 10%. But share repurchases are expected to be suspended through the balance of fiscal 2021.

In addition to the quarterly results, management introduced guidance for fiscal 2021, as well the first quarter. 

For the full year, Starbucks expects consolidated revenue of $28 billion to $29 billion, compared to consensus of $28.215 billion. Global comparable store sales growth is forecast at 18% to 23%. By region, Americas and U.S. comps are expected to increase 17% to 22%, while International comps are forecast to grow 17% to 22% -- with China up 27% to 32%. Channel Development revenue is expected to be in the range of $1.4 billion to 1.6 billion. 

Management plans to open 2,150 new stores with 1,100 net new Starbucks stores globally. More than half of the net new store growth is expected to come in China (600), followed by International (1,050), then Americas (50).

Non-GAAP margins are expected to be in the range of 16% to 17%, all leading to non-GAAP EPS in the range of $2.70 to $2.90 for the full year and that's nicely higher than the consensus estimate of $2.73.

But non-GAAP EPS is expected to be strongest in the back half of the year, and management forecasts first-quarter earnings in the range of $0.50 to $0.55. That result was much lower than estimates of $0.63. Given the uncertainty of what this time next year will look like, some may look past the stronger-than-expected full year forecast and focus specifically on the next quarter's result.

So there you have it. The better-than-expected result and steady recovery in business trends gives us confidence that Starbucks will continue to execute in the future. Furthermore, management's accelerated investment in areas like pickup, delivery, and drive-thru has transformed the company closer to changing consumer preferences, so Starbucks will be much more resilient if we ever go through a pandemic again or if the current one continues. Lastly, even in these troubled times, Starbucks continues to focus on its digital experience and new product innovations that will keep its customer coming back day after day for a high-quality service.

Everything Starbucks has achieved since the start of the pandemic is why we continue to believe the company will come out of the pandemic on an even stronger footing. It's focusing on drive-thru locations, digital relationships, new pickup-only store concepts, and additional contact-free opportunities. The company is doing everything right in terms of responding to shifts in consumer behavior and operating the best it can in a Covid-19 world. Though next quarter's earnings guidance may be light, as margins will need time before getting close to pre-Covid-19 levels, we continue to believe the company is well positioned for the future.

We'll look to revise our price target in our Weekly Roundup Friday.

Action AlertsPLUS, which Cramer co-manages as a charitable trust, is long SBUX.