Starbucks Corporation (SBUX) has been holding its own on Wall Street this year. Down just 2.7% in 2016 — compared to a 7% decline in the S&P 500 — shares of the world’s favorite coffee chain have managed to hold their own during a time of extreme volatility.
It looks like that’s about to change.
Shares of SBUX stock are off nearly 3% in early trading on Friday after the Seattle-based coffee shop reported fiscal first-quarter earnings. Despite earnings per share coming in higher than analysts expected, there were a few things in Thursday’s report that investors took as red flags.
Let’s dig in to the numbers to see where things went wrong.
SBUX: A Victim of its Own Success
Starbucks’ Q1 EPS came in a penny above the 45-cent estimate, at 46 cents per share. Still, that was 29% below EPS in the year-ago quarter. And while revenue increased 11.9% to $5.37 billion, that was still below the $5.39 billion estimate.
On Tuesday, I previewed Q1 Starbucks earnings numbers, concluding that SBUX stock didn’t look like a good bet ahead of the report. I had three principle concerns, all of which are factoring into SBUX stock’s underperformance today:
Concern No. 1: Starbucks shares looked priced to perfection going into the earnings call. Its consistent success over the years caused Wall Street to become overly infatuated with shares, and I cautioned that…
“SBUX stock doesn’t pass muster in my book when it comes to the whole ‘attractive prices’ checkbox. Shares trade for 32 times earnings and 27 times forward earnings, a steep price for a mature company growing revenue in the low teens.”
Result: “I think that you have to beat, and you have to raise substantially when you’re trading at 30 times forward estimates,” said CNBC‘s Stephanie Link, when asked about why Starbucks stock fell.
Concern No. 2: Forward guidance, historically speaking, looked like an area where SBUX was more likely to struggle:
“…forward guidance in the second quarter may prove even more important. To that end, analysts expect Q2 EPS of 40 cents, up from 33 cents, on revenue of $5.04 billion, up 10.5% year-over-year.
SBUX stock has a pretty strong record of meeting or exceeding EPS expectations, and hasn’t whiffed on earnings since January 2014, eight quarters ago.
But when was the last time Starbucks missed on guidance? That’s far easier to find — last quarter.”
Result: True to form, Starbucks missed on guidance, forecasting Q2 non-GAAP EPS between 38 cents and 39 cents per share, less than the 40 cents Wall Street was looking for.
Concern No. 3: The slowdown in China posed a threat to SBUX growth:
“…one of Starbucks’ most important initiatives at the moment is a multi-year expansion in China, where it plans to boost its store count from 900 to 3,400 over the next five years. At a time when China’s growth rate just touched its lowest level in the last quarter-century, some of that expected growth may be overly built-in.”
Result: Indeed, same-store sales, or SSS, growth in China came in at 5%, failing to meet expectations. That’s especially weak in light of the 9% SSS growth in the Americas and 8% SSS growth globally.
At the end of the day, Starbucks is still a great company. Not many consumer companies have the sort of mobile rewards programs that Starbucks does, and you’d be hard-pressed to find a ton of other companies with $1.9 billion loaded on their gift cards.
Once the price comes back down to earth, SBUX stock will be worth a look. But I won’t be considering this stock personally until it pulls back another 15% to 20%.
As of this writing, John Divine had no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
