Starbucks Off to Slow Start
Despite the soft U.S. results, we think the wide-moat firm remains a compelling capital-allocation story at its current price.
The natural question from a moat perspective is whether this implies any brand degradation or competitive issues. We're not convinced it does--peak-hour transactions remain healthy and last year's congestion issues appear to be in the past--and equate the current softness to innovation issues that periodically affect even wide-moat restaurant chains, as well as other store streamlining efforts. While we'll trim our 2018 consolidated comps to 3% and assume modest operating margin contraction (versus 19.2% last year) due to U.S. weakness and tax-reform-related employee and digital investments, we see full-year adjusted EPS of $2.48-$2.53 as realistic. We also view mid-single-digit comps, high-single-digit revenue growth, and operating margins in the low 20s as realistic long-term assumptions based on gradual U.S. improvement, a still-tremendous China growth opportunity, and meaningful channel development optionality.
Despite the soft U.S. results, we're planning a modest increase in our $66 fair value estimate due to a lower long-term tax rate. We still see shares as undervalued while also offering a compelling capital-allocation story.
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