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In the last reported quarter, the company’s earnings missed the Zacks Consensus Estimate by 13.9%. The company’s top and the bottom line declined 1.8% and 8.1% year over year, respectively.
SBUX surpassed earnings in the trailing two out of four quarters. The average surprise over this period is a negative 0.4%, as shown in the chart below.
Image Source: Zacks Investment Research
Trend in Estimate Revision
The Zacks Consensus Estimate for fiscal third-quarter earnings per share (EPS) has declined to 93 cents from 94 cents in the past seven days. The estimated figure indicates a 7% decline from the year-ago EPS of $1.00. However, the consensus mark for revenues is pegged at $9.22 billion, indicating 0.6% year-over-year growth.
Image Source: Zacks Investment Research
What the Zacks Model Unveils
Our proven model doesn't conclusively predict an earnings beat for Starbucks this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat.
Earnings ESP: Starbucks has an Earnings ESP of +0.12%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company carries a Zacks Rank #4 (Sell) at present.
SBUX’s performance in third-quarter fiscal 2024 is likely to have been hurt by a slower-than-anticipated recovery in China. Lower consumer visits to its restaurants are a major issue, leading to a significant reduction in traffic. It is also facing intense competition from value-focused players in the market.
Cautious spending attitude among U.S. consumers, heightened promotional activities both domestically and internationally, economic instability in the Middle East affecting U.S. business due to boycotts and persistent macroeconomic challenges in China are likely to have negatively impacted the company’s performance.
Our model predicts North America and International comparable sales growth to decline 2.5% and 5% from prior-year levels, respectively.
In third-quarter fiscal 2024, our model suggests North America and International sales to be $6,842.1 million and $1,870.9 million, implying a 1.5% increase and 5.2% decline from the year-ago actuals, respectively.
On the other hand, the margin in the quarter to be reported is likely to have been hurt by several factors, including increased costs due to investments in employee wages and benefits, intense promotional efforts and lapping the gain on the sale of Seattle's Best Coffee brand. Higher general and administrative expenses, particularly supporting Starbucks’ reinvention initiatives, will likely add to woes. Our model predicts, the operating margin adjusted to be 17.2% compared with 17.4% reported in the prior-year quarter.
Price Performance & Valuation
This year, the Restaurant industry underwhelmed investors and Starbucks is no exception. Year to date, Starbucks' stock has dropped 23.5% compared with an 11.8% decline for the industry. Other major players have also seen declines — Darden Restaurants, Inc. (DRI - Free Report) down 13.6%, McDonald's Corporation (MCD - Free Report) down 15.2%, and Restaurant Brands International Inc. (QSR - Free Report) down 12.2%.
Image Source: Zacks Investment Research
From a valuation perspective, Starbucks is trading at a discount with a forward 12-month price-to-earnings (P/E) ratio of 18.68, which is lower than the industry's ratio of 21.18 and the S&P 500's ratio of 21.71.
Image Source: Zacks Investment Research
Investment Thoughts
Given the various challenges Starbucks faces — slower-than-expected recovery in key markets, heightened competition, increased costs and global economic instability — the outlook for the fiscal third quarter appears bleak. Despite its discounted valuation, the combination of negative earnings trends, cautious consumer behavior and increased operational costs suggests that investors should approach SBUX with caution. At this time, staying away from Starbucks stock may be the prudent choice until there are clearer signs of recovery and stabilization in its performance metrics. The management's insights during the third-quarter 2024 earnings call, especially concerning the recovery in China, will be crucial in determining Starbucks' near-term outlook.
Image: Bigstock
Starbucks (SBUX) Q3 Earnings Loom: Buy, Sell or a Wait-and-See?
Starbucks Corporation (SBUX - Free Report) is slated to release third-quarter fiscal 2024 numbers on Jul 30, after the closing bell.
In the last reported quarter, the company’s earnings missed the Zacks Consensus Estimate by 13.9%. The company’s top and the bottom line declined 1.8% and 8.1% year over year, respectively.
SBUX surpassed earnings in the trailing two out of four quarters. The average surprise over this period is a negative 0.4%, as shown in the chart below.
Image Source: Zacks Investment Research
Trend in Estimate Revision
The Zacks Consensus Estimate for fiscal third-quarter earnings per share (EPS) has declined to 93 cents from 94 cents in the past seven days. The estimated figure indicates a 7% decline from the year-ago EPS of $1.00. However, the consensus mark for revenues is pegged at $9.22 billion, indicating 0.6% year-over-year growth.
Image Source: Zacks Investment Research
What the Zacks Model Unveils
Our proven model doesn't conclusively predict an earnings beat for Starbucks this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat.
Earnings ESP: Starbucks has an Earnings ESP of +0.12%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company carries a Zacks Rank #4 (Sell) at present.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Influencing Q3 Performance
SBUX’s performance in third-quarter fiscal 2024 is likely to have been hurt by a slower-than-anticipated recovery in China. Lower consumer visits to its restaurants are a major issue, leading to a significant reduction in traffic. It is also facing intense competition from value-focused players in the market.
Cautious spending attitude among U.S. consumers, heightened promotional activities both domestically and internationally, economic instability in the Middle East affecting U.S. business due to boycotts and persistent macroeconomic challenges in China are likely to have negatively impacted the company’s performance.
Our model predicts North America and International comparable sales growth to decline 2.5% and 5% from prior-year levels, respectively.
In third-quarter fiscal 2024, our model suggests North America and International sales to be $6,842.1 million and $1,870.9 million, implying a 1.5% increase and 5.2% decline from the year-ago actuals, respectively.
On the other hand, the margin in the quarter to be reported is likely to have been hurt by several factors, including increased costs due to investments in employee wages and benefits, intense promotional efforts and lapping the gain on the sale of Seattle's Best Coffee brand. Higher general and administrative expenses, particularly supporting Starbucks’ reinvention initiatives, will likely add to woes. Our model predicts, the operating margin adjusted to be 17.2% compared with 17.4% reported in the prior-year quarter.
Price Performance & Valuation
This year, the Restaurant industry underwhelmed investors and Starbucks is no exception. Year to date, Starbucks' stock has dropped 23.5% compared with an 11.8% decline for the industry. Other major players have also seen declines — Darden Restaurants, Inc. (DRI - Free Report) down 13.6%, McDonald's Corporation (MCD - Free Report) down 15.2%, and Restaurant Brands International Inc. (QSR - Free Report) down 12.2%.
Image Source: Zacks Investment Research
From a valuation perspective, Starbucks is trading at a discount with a forward 12-month price-to-earnings (P/E) ratio of 18.68, which is lower than the industry's ratio of 21.18 and the S&P 500's ratio of 21.71.
Image Source: Zacks Investment Research
Investment Thoughts
Given the various challenges Starbucks faces — slower-than-expected recovery in key markets, heightened competition, increased costs and global economic instability — the outlook for the fiscal third quarter appears bleak. Despite its discounted valuation, the combination of negative earnings trends, cautious consumer behavior and increased operational costs suggests that investors should approach SBUX with caution. At this time, staying away from Starbucks stock may be the prudent choice until there are clearer signs of recovery and stabilization in its performance metrics. The management's insights during the third-quarter 2024 earnings call, especially concerning the recovery in China, will be crucial in determining Starbucks' near-term outlook.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.