The world’s biggest chain of coffee houses reported its second-quarter results after Thursday’s closing bell range, and though Starbucks Corporation (SBUX) technically did well, SBUX shares still fell nearly 5% in response to the news.
Of course, with a trailing price-to-earnings ratio approaching 40 and a forward-looking P/E over 25, it wouldn’t even be accurate to say Starbucks stock was priced to perfection — it was priced for beyond perfection, with most investors likely counting on a big beat of top- and bottom-line estimates.
When that didn’t happen, strong selling was inevitable.
Still, the results were respectable, forcing investors to make a tough decision today, now that Starbucks shares are “on sale.”
Last quarter, Starbucks earned 39 cents per share on $4.99 billion worth of revenue. The bottom line was in line with estimates, but the top line fell short of the expected $5.03 billion. Both figures, however, were much better than the result from the same quarter a year earlier, when Starbucks earned 33 cents per share and generated $4.56 billion worth of sales.
Same-store sales were up 6% overall in the second fiscal quarter. In the United States, same-store sales were 7% higher. They were up 3% in Asia, while in Europe, the Middle East and Africa, same-store sales grew 1%.
Chief Financial Officer Scott Maw said of the results:
“Starbucks Q2 represented another quarter of solid growth, with the highest revenues of any non-holiday quarter in our history and excellent financial, operating and profit performance. The record-setting performance we delivered in the first half of fiscal 2016 ideally positions us to benefit from the investments we are making in our partners, in our stores and in groundbreaking innovation, and to continue delivering world class returns to our shareholders into the future.”
While the numbers were mostly good, they weren’t good enough. Same-store sales were a particular sore spot, as analysts collectively expected a 6.7% improvement. At TheStreet.com, Jack Mohr commented on the company’s year-over-year sales comparisons:
“Starbucks has no room for a same-store sales miss, even a marginal one — sustainability (and consistency) of a high-single digit percentage same-store sales growth, 10% plus overall sales growth and 15% to 20% earnings per share growth algorithm is ultimately key.”
As for the future, the company remains optimistic even if investors don’t.
For the current quarter, the company expects to report earnings of between 48 and 49 cents per share of Starbucks stock, versus the 42 cents per share earned in the same quarter a year earlier. On a full-year basis, profits are now expected to roll in between $1.88 and $1.89 per share, handily topping the $1.58 worth of per-share profit driven in the previous fiscal year. Analysts were calling for 49 cents and $1.89, respectively.
One big sigh of relief … recent changes in the company’s rewards program haven’t become an impediment.
The old rewards program, which simply rewarded the frequency of visits, was changed earlier this month to one that rewards the total dollar amount spent at Starbucks. Chief Strategy Officer Matt Ryan plainly said “We are not seeing any of the noise that has been speculated on.”
In fact, the company reported an 8% increase in its loyalty rewards program usage last quarter, and a 16% increase in the number of people who use it.
Starbucks isn’t paring back its plans to grow in China either, despite tepid same-store sales growth in the region last quarter. CEO Howard Schultz stated “I’m more convinced than ever than Starbucks is just getting started in China.”
Its channel development division — which handles products like K-cups, ready-to-drink beverages and goods found in grocery stores — saw an 8% increase in sales.
The unit still only makes up about 10% of the company’s revenue, but its margins are almost double those produced by Starbucks stores. Any growth there provides an outsized boost to the bottom line.
Bottom Line for Starbucks Stock
While Starbucks has plenty of growth opportunity in front of it, particularly in China, it doesn’t have the kind of growth in view that can justify such a lofty valuation; the forward-looking P/E of 26 is simply too steep of a price to pay for what will likely be only a single-digit growth rate for the foreseeable future … reliable as that growth outlook may be.
That’s the indirect way of saying anyone holding SBUX right now expecting a big return in the near future is betting other investors care more about owning the high-profile name than what Starbucks shares are actually worth.
That strategy can play for a while in some environments, but it has not been playing very well in the current market environment. Right now, companies must prove their stocks are worth their price.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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