Here’s What We Are Watching For In Starbucks’ Q2 2017 Earnings

After a disappointing Q1, 2017 where the company missed revenue and EPS analysts estimates due to a slowdown in comparable sales growth in North America, Starbucks‘ (NYSE:SBUX)stock price has been range bound for the last three months. Comparable sales growth in North America slowed down due to a congestion problem caused by the company’s successful mobile order and pay system. Starbucks is taking several measures to resolve this issue including a short term resolution of sending text messages to customers when their orders are ready, to longer term solutions such as a store redesign to tackle the congestion. We will be watching the impact of these measures when the company declares its Q2 2017 results on April 27^th 2017. The market appears to be in a “wait and watch” mode with Starbucks’ stock price not showing any significant upside in the last three months. Slowdown in the comp sales in America and uncertainty over the company’s growth in China owing to the “Trump Phenomena” appear to be the main causes for the market discounting Starbucks’ growth. (Read Why Is The Market Discounting Starbucks’ Growth Story?)

Below is a summary of consensus estimates for Starbucks for Q2 2017:

Source: Yahoo Finance

This is in line with our estimates for steady revenue growth for Starbucks over our forecast period:

Apart from the congestion issue due to the mobile order and pay system, and the uncertainty over growth in China, Starbucks’ competition in the food segment intensified due to the recent acquisition of Panera by JAB. Starbucks is focused on growth in its food business and is launching Starbucks Mercato – a new lunch menu with a goal to double its food revenues by 2021. However, with Panera being acquired by JAB it can now expand aggressively and compete better with Starbucks with its innovative menu. (Read Here’s How Panera’s Acquisition By JAB Can Impact Starbucks, Dunkin’ Brands).

The overall weakness in the restaurant industry continues and according to insights from Black Box intelligence,  which are based on weekly sales data from over 145 restaurant brands, the first quarter of 2017 has not been very encouraging for the restaurant industry. Comparable sales and traffic have declined year on year in both February and March, with January being the only exception, reporting flat comp growth year on year.

North America and China are two key regions for Starbucks and we will be closely watching the comp growth in both these regions for Q2 2017. While China was a bright spot in Q1 2017, sustained growth in this region is critical for Starbucks’ valuation. Similarly a slowdown in North America for a longer period can adversely impact the company’s valuation. Below is a summary of Starbucks’ comp growth in the past four quarters:

For more details, see our complete analysis for Starbucks

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