Starbucks Earnings Mixed, But Stock Remains ‘Attractive’

Wide-moat Starbucks posted mixed fiscal third-quarter results, with revenue of $8.15 billion narrowly missing our $8.2 billion forecast, while diluted EPS of $0.79 healthily outstripped our $0.63 estimate. The bulk of the difference was attributable to timing, with a planned $500 million investment in partner wages being phased in during the fourth quarter in lieu of the fiscal third quarter (where we’d penciled it in).

Long-Term Forecasts Unchanged

The net effect for the full year is similar, though our full-year forecast for operating margin should tick up slightly to 13.4% from 13% due to unusually strong growth in the consumer packaged goods business, which carries 40% operating margin.

We see no reason to alter our long-term forecasts of 9%, 11%, and 12% average annual growth in sales, operating profit, and EPS respectively through 2031. This reflects a marquee global brand with meaningful pricing power, increasing penetration of the cold beverages platform, and digital tools internationally, and a strong resonance with experience-driven Generation Z customers that should pay dividends for years to come. We plan to maintain our $100 fair value estimate and view shares as attractive.

Reinvention Plan Coming Next Month

During the call, management outlined the main pillars of the firm’s reinvention plan, to be outlined more comprehensively at its investor day on September 13. Ultimately, we view investments in partner wages and benefits, reimagining store layouts to better accommodate the 72% of sales that now come through delivery, drive-thru and digital channels, and in customer personalization as prudent uses of capital, which should underpin more durable comparable store sales growth over the next couple of years.

Last, while we’re pulling down our sales growth forecasts for fiscal 2023 by about 2%-3% amid steadily building pressure on consumer discretionary incomes, we’re encouraged by traffic growth in the quarter despite three price increases over the past year, suggesting the firm hasn’t priced out its core customers.