Starbucks Corporation (NASDAQ:SBUX) released its quarterly earnings on Thursday after the close. The results didn’t look pretty and SBUX stock paid the price, falling 7% to below $51 in after-hours trading.
On the surface, Starbucks earnings were pretty ugly. Sales of $5.7 billion were flat year-over-year — a big no-no for SBUX stock. It also missed analysts’ estimates by $110 million. Comparable-store sales rose just 2% vs. expectations of 3.2%.
Ultimately, it cut its long-term financial outlook as well. Starbucks now expects global comp-store sales growth of 3% to 5% going forward. Revenue should grow in the high single digits and earnings growth should be 12% or more, not 15% to 20%.
Starbucks Earnings Aren’t As Bad As You Think
As I said, on the surface, Starbucks earnings were bad. But with a closer look, there are positives for SBUX stock. For starters, last year’s quarter had an extra week, thus this quarter, sales were flat. Excluding that extra week, revenue actually rose 8%. That’s certainly better than the 0.4% decline in the headline.
Next, comp-store sales of 2% were a result of the two massive hurricanes that slammed the South. Excluding the storms, comps came in at 3%. Still below the 3.2% estimate, but only by 20 basis points, not 120.
Another plus? Operating margins expanded, albeit by just 0.1% to 19.7%. But the capital return was a win for me. When I outlined seven future blue-chip stock buys, SBUX stock made the list. Why? Because of its combination of global growth and its ability to raise the dividend by double-digit percentages year in and year out.
As it routinely does, Starbucks raised its dividend in the fourth quarter. It will now pay out a quarterly dividend of 30-cents-per-share, up 20% from 25 cents. SBUX stock will now yield ~2.2% from current levels. Through dividends and share repurchases, management is committed to returning $15 billion over the next three years. That’s no drop in the bucket for a $79 billion company.
Furthermore, Starbucks is selling off its Tazo tea brand to Unilever plc (ADR) (NYSE:UL) for $384 million. It’s part of the “strategic actions the company is taking as it focuses on accelerating growth in high-returning businesses and streamlining its operations.”
In short, management is focused on the big winners and efficiencies.
China
China is certainly one of those winners. Growing comp-store sales by 8% YoY in the quarter, it was the strongest result in nine quarters. SBUX’ pending $1.3 billion purchase of the remaining 50% stake in its East China JV will only drive stronger results when the deal closes.
There’s a reason why Starbucks is so committed to this region and it’s thanks to its enormous size and potential. SBUX is building 500 stores annually for years to come, in an effort to keep up with demand. With a middle class that will be the size of the entire U.S. population within the next decade, there’s good reason to be excited about the company building out its footprint aggressively.
Trading SBUX Stock Price
Were Starbucks earnings perfect? Heck no. There’s a reason SBUX stock went lower after hours and it is about flat on Friday, rather than up 5% or more. After looking at the release, I said these numbers look better than the stock is acting. As a result, I added to my position in SBUX stock for just the second time in years.
Starbucks still has some flaws. Trading at about 23 times forward earnings is one of them. Maybe that figure will fall to 20 or 21 times. I’m not really sure. This nonchalant take is frustrating for some, I’m sure. And I don’t want to see the SBUX stock price go any lower.
But the truth is, we have high single-digit revenue growth and a double-digit earnings grower. A company that generates monstrous cash flow, wide margins (for a retailer) and it has an in-demand product. It’s buying back stock and continually raises its dividend by 20% or more each year. The kicker? China’s growth is stunning and its Reserve and Roastery business should only help boost average ticket sizes and margins.
The valuation is high, but I feel that the stock is worth the premium. Now near flat post-earnings, some investors might want to see if SBUX stock price retests the low-$50s. I can’t blame them. If it does, I would be a buyer (again). But trading flat/higher on perceptibly bad news can be a good sign too. Mostly that the bad news is all priced in.
Investors with no position could consider buying a partial position now and adding on declines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he held a long position in SBUX.
