Starbucks (NASDAQ:SBUX) recently gave a presentation at Goldman Sachs where it lowered its forecast for its fiscal year 2020 ending September 2020. The CFO forecast non-GAAP earnings per share in fiscal year 2020 that would be just 10% above the EPS projected for FY 2019. Investors did not seem pleased.
This 10% growth rate for FY 2020 will be much lower than the 16% growth expected for FY 2019. More importantly, it will be much lower than the 13% EPS growth rate originally projected for FY 2020 at Starbucks’ Investor Day presentation earlier this year:
Starbucks stock has been on a tear this year, up over 49% YTD. That was because of the expected increase in SBUX non-GAAP EPS to $2.81 from $2.42 last year, up 16%.
But if the FY 2020 non-GAAP EPS growth of just 10% comes to pass, SBUX stock may take a hit — or at least a breather — from its impressive rise this year.
Share Buybacks Moved Forward
One of the reasons SBUX stock lowered its outlook is because it moved $2 billion of share buybacks that were expected to be completed in FY 2020 to this year.
That means less buybacks next year and hence lower-than-expected EPS for FY 2020. But it also means that there will be less activity in the market helping to push up the Starbucks stock price. In fact, one wonders how much of the price rise this year was due to SBUX stock’s aggressively buybacks.
For example, based on its latest SEC 10-Q filing in the nine months to June 30, 2019, SBUX has spent $7.97 billion on share repurchases. This was up from just $4.06 billion spent the same period last year, or 94% more. It’s very likely that this almost doubling in its buybacks played a significant role in pushing up the stock 49% so far this year.
It also is one of the main reasons that Starbucks’ non-GAAP EPS will rise 16% this year, since the underlying growth for pre-tax earnings will be up less than 1%, according to one analyst.
Why is that? Because the denominator in the EPS ratio has fallen a lot. So far this year SBUX has lowered its shares outstanding by 7.8% through buybacks. It will likely be down 10% by September with the additional $2 billion in share buybacks that Starbucks moved up.
What Investors Can Expect
Putting together the series of statements that SBUX has made about pulling forward its share buybacks, it is now not clear how much share buyback activity it will have in FY 2020 (i.e. starting in October 2019).
For example, in the third-quarter conference call management said it would complete $4 billion of shareholder capital returns in FY 2020. The $1.44 annual dividend will cost about $1.7 billion. The remaining $2.3 billion was supposed to be used for buybacks in FY 2020. But Starbucks CFO made clear that $2 billion of those buybacks were pulled into FY 2019, i.e. during the quarter ending September 2019.
So analysts are going to be looking at whether SBUX stock announces a new buyback program when it reports the Q4 earnings sometime on Oct. 30.
If it does, then maybe the 10% EPS projected for FY 2020 will be higher and there will be continuing underlying purchases pushing up the stock.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
