A month has gone by since the last earnings report for Starbucks (SBUX). Shares have added about 4.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Starbucks due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Starbucks reported better-than-expected first-quarter fiscal 2025 results, with earnings and net revenues topping the Zacks Consensus Estimate. However, the bottom line declined year over year while the top line remained relatively flat.
The quarter’s performance reflects incremental contributions from net new company-operated store openings over the past 12 months, partially offset by a decline in global comparable store sales. This was accompanied by lower product and equipment sales to the company’s licensees. Global comps were primarily affected by dismal trends in the United States as well as the international market. Furthermore, high operating expenses due to increased store operating expenses, along with general and administrative expenses, marred the bottom-line growth.
To boost sales growth globally and tackle the negative market impacts to some extent, Starbucks aims to mainly focus on implementing its “Back to Starbucks” plan along with realizing gains from supply-chain efficiencies and annualization of pricing. Also, its efforts toward menu simplification, effective marketing campaigns and the removal of the extra charge for non-dairy milk customizations are expected to drive growth in fiscal 2025.
In the fiscal first quarter, the company reported earnings per share (EPS) of 69 cents, which topped the Zacks Consensus Estimate by 4.6%. The bottom line decreased 23% year over year from EPS of 90 cents reported in the prior-year quarter.
Net revenues of $9.398 billion also surpassed the consensus mark of $9.3 billion by 1%. In the prior-year quarter, the company reported net revenues of $9.425 billion, almost at par with the reported value.
Global comparable store sales declined 4% year over year. The downside was backed by a decrease of 6% in comparable transactions, partially overshadowed by a 3% increase in average tickets.
During the quarter, Starbucks opened 377 net new stores worldwide, bringing the total store count to 40,576 at the quarter end.
The company’s operating margin contracted 390 basis points (bps) to 11.9% from the prior year. The decline was mainly due to deleveraging and investments in the “Back to Starbucks” plan, including store partner wages, benefits and hours, and the removal of the extra charge for non-dairy milk customizations. However, this contraction was partially offset by the annualization of pricing and supply-chain efficiencies.
On a constant currency (cc) basis, the operating margin contracted 380 bps year over year.
Starbucks has three reportable operating segments, North America, International and Channel Development.
North America: The segmental net revenues were $7.072 billion, down 1% year over year. The segment’s comparable store sales declined 4% against 5% growth in the prior-year quarter. Average transactions declined 8%, whereas change in tickets rose 4% year over year.
Operating margin contracted 470 bps to 16.7% from 21.4% in the prior-year quarter. Our model expected this segment’s operating margin to be 16.3% in the quarter.
International: This segment’s net revenues of $1.871 billion inched up 1% year over year. Comparable store sales declined 4% against 7% growth in the prior-year quarter, owing to a 2% decline in both transactions and tickets.
Operating margin contracted 40 bps year over year to 12.7%. The downside was due to increased promotional activity and strategic investments in store partner wages and benefits. This contraction was partially mitigated by supply chain and in-store efficiencies. We expected this metric to be 13.7% in the quarter.
In the fiscal first quarter, comps in China dropped 6% against growth of 10% in the prior-year quarter. A decline of 2% in transactions and 4% in tickets hurt the company’s performance in China.
Channel Development: Net revenues in the segment fell 3% year over year to $436.3 million. The dismal performance was due to a decline in contributions in the Global Coffee Alliance from SKU optimization and a fall in global ready-to-drink revenues.
The segment’s operating margin expanded 90 bps year over year to 47.7%. The increase was driven by the mix shift and lower product costs related to the Global Coffee Alliance. This growth was partially offset by higher costs in SBUX’s North American Coffee Partnership joint venture income. We expected the operating margin to be 38% in the quarter.
The company ended the fiscal first quarter with cash and cash equivalents of $3.671 billion compared with $3.286 billion at the fiscal 2024-end. As of Dec. 29, 2024, long-term debt totaled $14.312 billion compared with $14.319 billion as of Sept. 29, 2024. The current portion of long-term debt as of the quarter end was $1.249 billion, at par with the value as of fiscal 2024-end.
Meanwhile, management declared a quarterly cash dividend of 61 cents per share. The dividend is payable on Feb. 28, 2025, to its shareholders of record as of Feb. 14.
The Starbucks Rewards loyalty program’s 90-day active members in the United States was 34.6 million, up 2% sequentially and 1% year over year.
On Oct. 22, 2024, the company announced the suspension of its guidance for fiscal 2025. However, in the first-quarter 2025 earnings call, the company briefly hinted at its expectations regarding the second quarter and fiscal 2025.
Starbucks expects second-quarter EPS to be low (on an absolute basis) because of seasonality, organizational restructuring and elevated investments. The company expects that the EPS trend will improve sequentially and year over year in the latter half of fiscal 2025.
It expects general and administrative expenses (as a percentage of revenues) in the second quarter to be up year over year due to a hike in several expenses, including near-term restructuring charges, costs to support the organization, and severance pay and related benefits.
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -8.67% due to these changes.
Currently, Starbucks has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Starbucks has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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