Valuentum Exclusive Analysis for the Discerning Investor

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By Callum Turcan

On January 26, Starbucks Corporation (SBUX) reported first quarter earnings for fiscal 2021 (period ended December 27, 2020) that saw the firm miss consensus top-line estimates but beat consensus bottom-line estimates. The ongoing coronavirus (‘COVID-19’) pandemic has weighed negatively on Starbucks’ performance of late, as its GAAP revenues fell by 5% and its GAAP operating income tanked by 25% on a year-over-year basis last fiscal quarter. Leaning on its digital presence and drive-through operations have helped to a degree, but the reduction in the number of workers commuting worldwide (especially in the US) is clearly taking a toll on its business, as is the decline in vacation and business travel. Shares of SBUX yield ~1.8% as of this writing and appear fairly valued at this time as the top end of our fair value estimate sits at $100 per share of SBUX.

Earnings Overview

The firm’s comparable store sales declined by 5% in the US last fiscal quarter, with a 19% increase in the average ticket offset by a 21% decline in transactions. However, Starbucks’ comparable store sales in China grew by 5% last fiscal quarter as a 9% increase in the average ticket size offset a 3% decline in transactions. This is largely due to the COVID-19 pandemic hitting Western nations, including the US, harder than China of late--though we caution that the public health crisis continues to pose a serious threat to all nations. Starbucks reported that its global comparable store sales fell by 5% last fiscal quarter as a drop in transactions offset higher average tickets.

Even in the face of serious exogenous headwinds, Starbucks was still able to generate $1.5 billion in free cash flow in the fiscal first quarter, up modestly year-over-year, which fully covered $0.5 billion in dividend obligations. The company did not spend a significant amount buying back its stock last fiscal quarter.

As of December 27, Starbucks had $6.0 billion in cash, cash equivalents, short-term investments, long-term investments, and long-term equity investments on hand versus $1.2 billion in short-term debt and $14.7 billion in long-term debt on the books. We caution that Starbucks also has material operating lease liabilities to be aware of. Its impressive free cash flow generating abilities makes its debt load manageable, though in our view, it would be prudent for Starbucks to repair its balance sheet as its performance improves. A net debt load and the related annual financing expenses limits Starbucks’ financial flexibility.

Outlook

Looking ahead, Starbucks forecasts that its comparable store sales will grow 17%-23% in fiscal 2021 with growth expected across the board, geographically speaking. In China, Starbucks aims to grow its comparable store sales by 27%-32% this fiscal year which is expected to help drive up its ‘International’ comparable store sales growth to 25%-30% in fiscal 2021. Pivoting to its Americas division, the firm expects its comparable store sales will climb higher 17%-22% this fiscal year. Starbucks plans to open ~1,100 new net stores in fiscal 2021, with ~600 net new stores expected to open in China. Clearly, Starbucks sees its operational performance rebounding in fiscal 2021, which will go a long way to improving its financial performance.

All of this is expected to culminate into Starbucks posting $28.0-$29.0 billion in revenue and GAAP EPS of $2.42-$2.62 in fiscal 2021, keeping in mind there is a 53rd week this fiscal year (a dynamic that added $0.5 billion to its revenue forecast and $0.10 to its GAAP EPS forecast). For reference, Starbucks posted $23.5 billion in GAAP revenues and $0.79 in diluted GAAP EPS in fiscal 2020 (period ended September 27, 2020) after its business got hammered by the COVID-19 pandemic. In fiscal 2019 (period ended September 29, 2019), Starbucks generated $26.5 billion in GAAP revenues and $2.92 in diluted GAAP EPS.

Concluding Thoughts

Today, we are reiterating our fair value estimate of $80 per share of Starbucks, and the top end of our fair value estimate range sits at $100 per share. As of this writing, shares of Starbucks appear to be fairly valued at this time. While Starbucks’ operations are rebounding and its guidance for fiscal 2021 indicates the firm expects ongoing COVID-19 vaccine distribution activities will have a powerful impact on its near-term financial performance, the firm’s current share price already takes into consideration its pending recovery, in our view. We are not interested in adding Starbucks to any of our newsletter portfolios at this time.

For members that have not read the article already, we encourage you to read our note Starbucks’ Long-Term Outlook Is Improving which was published back in December 2020 (link here). Our favorite two restaurant names are Chipotle Mexican Grill Inc (CMG) and Domino’s Pizza Inc (DPZ), which we added to the Best Ideas Newsletter portfolio on January 12 (link here). To read more about why we are big fans of those two firms, please check out this note here.

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Discretionary Spending Industry – ATVI, BBY, CBRL, CMG, DIS, DG, DLTR, DPZ, DNKN, EL, F, GM, HAS, HD, LOW, MCD, NFLX, NKE, SBUX, TSLA, YUM, DKS, TJX, ROST, WHR, KMX, AZO, RL

Related restaurant stocks: DRI, EAT, JACK, MCD, SBUX, WING, TXRH, YUM, QSR, FAT, SHAK, NDLS, RRGB, ARCO, DENN, JAX, KRUS.

Tickerized for SBUX, DNKN, MCD, KDP, SJM, QSR, NSRGY, FXI, MCHI.

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Callum Turcan does not own shares in any of the securities mentioned above. Chipotle Mexican Grill Inc (CMG), Dollar General Corporation (DG), Domino’s Pizza Inc (DPZ) and The Walt Disney Company (DIS) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Dick’s Sporting Goods Inc (DKS) and Home Depot Inc (HD) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.