Starbucks Disappoints Again In Q4 2017, Lowers Long Term Growth Target

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Starbucks (NASDAQ: SBUX) announced its Q4 2017 results on November 2nd and the company narrowly missed consensus revenue estimates of $5.8 billion, reporting revenues of $5.7 billion in Q4 2017. While comparable sales growth in the U.S . was lower at 2% (3% excluding the impact of Hurricanes Harvey and Irma), the silver lining was that 1% of this growth was contributed by an increase in transactions. This indicates that the company is now able to attract new customers/generate higher traffic at its stores, which is crucial to gain market share and drive growth.

Below is a summary of the company’s financial performance for Q4 2017:

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While year on year revenue growth was flat in this quarter, it was because the previous quarter had an extra week. Excluding revenues for the extra week, the company would have registered a year on year revenue growth of 8% driven by comparable sales increase and incremental revenues from new store openings.

There was a significant decline in operating income in Q4 2017 compared to the same period in the previous year. This decrease was due to increase in partner investments and the product mix shift towards food.  The company expects margin improvement in the next fiscal year as sales leverage kicks in and results of these increased investments are visible.

Click here to see our complete analysis for Starbucks

Starbucks’ comparable sales growth in the U.S. was impacted by nearly 1 percentage point due to hurricanes Harvey and Irma and the company had to close 1,100 stores for extended periods of time. Below is a summary of the company’s region-wise comparable sales growth in the last four quarters.

China remained a growth region for the company and in fiscal year 2017, the region recorded a comparable sales growth of 7% along with strong profitability.  Below is a summary of the company’s regional performance in Q4 2017:

Going Forward:

  • Based on its Q4 2017 and fiscal year 2017 results, Starbucks revised its long term growth targets as follows:
    • Comparable sales growth in the range of 3% – 5%
    • Revenue growth in high single digits
    • EPS growth of 12% or better
  • Starbucks is making innovation in food and beverage its next operational priority to accelerate comparable sales growth in the U.S.
  • The company is likely to increase the focus on fast growing categories in Cold Brew, Draft Nitro beverages and alternative beverages such as almond and soy milk.
  • The company is looking to launch financial services products in the U.S. in conjunction with Chase. The products are likely to be Visa credit cards/prepaid cards offering affordable options and a rich rewards proposition.
  • Focus on China and Starbucks Roasteries and Reserve is likely to continue in the next fiscal year.
  • Higher transactions are likely to be the key revenue and profitability driver for the next fiscal year and the company believes that its investments in this year are likely to show results soon.
  • Along with its Q4 2017 results, Starbucks also announced the sale of its TAZO brand to Unilever. This move is to ensure that Starbucks can focus on a single tea brand, Teavana, going forward.

 

Our price estimate for Starbucks is $65, nearly 15% higher than its current market price. We will be updating our model based on the above results.

 

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