Starbucks Earnings: Strong Traffic, Cogent Investments Look Positive Despite Harsh Market Reaction

We believe that wide-moat Starbucks’ SBUX fiscal second-quarter results were largely positive, despite a harsh market reaction (shares fell 5%-6% in aftermarket trading), and expect to increase our $103 fair value estimate by a low-single-digit percentage due to time value. As we see it, the market’s reaction reflects disappointment in the firm’s decision to maintain, rather than raise, its full-year guidance despite a strong quarter (shares have surged 16.5% over the past month).

More concretely, Starbucks posted $8.7 billion in sales and $0.74 in adjusted EPS, ahead of our $8.5 billion and $0.68 forecasts. Transaction figures were particularly encouraging, with guest traffic increasing 6% in the U.S. and 7% in international markets, meaningfully better than first-quarter figures of up 1% and down 12%, respectively, with certain dayparts even eclipsing pre-COVID-19 traffic benchmarks. Our takeaway? Starbucks hasn’t increased prices too quickly for its core consumer and should be better positioned to achieve prepandemic restaurant-level margins more quickly than many of its value-oriented peers.

On the operations side, the firm remains committed to extracting operational efficiencies in its non-customer-facing functions through a combination of optimizing food and paper procurement and select technology investments. This strikes us as the appropriate tack for a challenging operating environment, with reaffirmed 2023 guidance for 10%-12% full-year revenue growth implying softer comparable sales momentum over the second half of the year—and by extension, limited incremental pricing power. Against that backdrop, operational efficiencies assume outsize importance, without the same benefit from sales leverage over fixed costs. Reflective of this view, we continue to see high-teens (19%) operating margins as achievable in the medium term despite current pressures, with an anticipated 11% five-year revenue CAGR driving meaningful leverage over fixed costs.