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Vivek Kumar
Starbucks

Starbucks Corporation, the leading specialty coffee retailer in the world, reported better-than-expected profit in the fourth quarter and forecasts a strong recovery in earnings next fiscal year from the COVID-19 shock, sending its shares up over 1% on Thursday.

The coffee chain reported GAAP earnings per share of $0.33, down from $0.67 in the prior year primarily due to unfavourable impacts related to the COVID-19 outbreak totalling nearly -$0.35 per share. Non-GAAP earnings per share of $0.51, down from $0.70 in the prior year. But that was higher than the market expectations of $0.31.

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Starbucks’ global comparable-store sales plunged 9%, driven by a 23% decrease in comparable transactions, partially offset by a 17% increase in average ticket. The company said it will open 1,100 net new Starbucks stores globally.

The leading restaurant chains in the world forecasts adjusted profit for the fiscal year 2021 between $2.70 per share and $2.90 per share. That was better than the market expectations of $2.74. The coffee company expects global comparable sales will grow 18%-23% next year, including China’s 27%-32% growth.

“A strong finish to the quarter, with comps declining just 4% in Sept, & more optimistic initial FY21 guidance than we feared. Incremental store closures better align the domestic portfolio & benefit margins. Overall, an encouraging quarter for an iconic brand, and a recovery trade as we push into 2021. Here we leave our estimates little changed, but our price target goes to $98 on assumed multiple expansion based on increased visibility,” said John Glass, equity analyst at Morgan Stanley.

Starbucks shares closed 1.3% higher at $88.30 on Thursday; the stock is up about a percent so far this year.

Executive Comments

“These results demonstrate the continued strength and relevance of our brand, the effectiveness of the actions we’ve taken to adapt to meaningful changes in consumer behaviour and the extraordinary efforts of our green apron partners to serve our customers and communities in challenging circumstances,” said Kevin Johnson, president and CEO.

“The guiding principles we established at the onset of the pandemic, combined with our industry-leading digital platform and our ability to innovate rapidly, continue to fuel our recovery and provide confidence in a robust operating outlook for fiscal 2021.  Our strategies are working and I am optimistic that we will emerge from the COVID-19 pandemic as a stronger and more resilient company,” Johnson added.

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Starbucks Stock Price Forecast

Seventeen equity analysts forecast the average price in 12 months at $92.85 with a high forecast of $101.00 and a low forecast of $82.00. The average price target represents a 5.15% increase from the last price of $88.30. From those 17 analysts, nine rated “Buy”, eight rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $98 with a high of $126 under a bull-case scenario and $60 under the worst-case scenario. The firm currently has an “equal-weight” rating on the coffee retailer’s stock. Starbucks had its price target lifted by JP Morgan to $82 from $80. The investment bank currently has a “neutral” rating on the coffee company’s stock.

Several other analysts have also recently commented on the stock. Bank of America raised their price target on Starbucks to $88 from $82 and gave the company a neutral rating. ValuEngine downgraded to a hold rating from a buy rating. Cowen upgraded to an outperform rating from a market perform rating and upped their price objective to $99 from $77.

Analyst Comments

“US, China sales meaningfully positively inflected in recent quarters. In the US, a refocus on beverage innovation, loyalty enhancements and labor reallocation have helped the top line; China has benefited from digital + delivery. Longer-term, operating margin targets of 17-18% may have upside driven by G&A reductions, procurement savings and less pressure from special projects (eg roasteries). Amount of reinvestment in labour, technology remains unclear,” said John Glass, equity analyst at Morgan Stanley.

“Long term EPS growth algorithm of 10%+ conservative; realistic EPS growth many be low to mid-teens. However, this is slower than historical growth and Covid-19 disruption will be material near term,” Glass added.

Upside and Downside Risks

Upside: 1) Less disruption/faster recovery post-Covid-19. 2) U.S. SSS above base case as growth drivers all work together. 3) China opportunity larger than expected in our base. 4) G&A cuts/margin upside. – highlighted by Morgan Stanley.

Downside: 1) Covid-19 impact worse than expected in US/China. 2) Slowing unit growth in US/China. 3) Costs impact margins more than expected. 4) Inability to meet G&A reduction targets. 5) Store base remodel pressures margins.

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