Earnings Preview – Starbucks (SBUX)
Starbucks (SBUX) will be reporting their Q1 earnings after the bell today. This write-up will focus on three specific areas: North America, China, and its Rewards program.
Kicking it off with North America, the consensus among sell-side/buy-side is that we won’t be seeing any major setbacks as it relates to same store sales. As Oppenheimer states, the outlook for North America remains solid. As far as what analysts are modeling, UBS analyst Dennis Geiger has comps coming in at 17% and then 10% on a 2-year stack. While he expects staffing, supply chain challenges, and other macro pressure to show up as headwinds, he believes underlying customer demand is intact, with contribution from pricing, drive-thru, premium beverages, food attach, and digital. Meanwhile, Evercore ISI analyst David Palmer is also forecasting in-line SSS growth in the US/Americas of 17%
The second area that investors will be looking at is the performance in China. There is expectation for both downside from China in fiscal Q1 and concern that fiscal Q2 trends have started off slow. Evercore ISI, in their preview note, said, “We will be continuing to watch China closely as it emerges from COVID. While we acknowledge the long-term secular tailwinds in China (~70% ROIC for new stores, growing coffee consumption, and rising middle class), expectations are for a slow recovery in SSS (vs. 2019) over the next few quarters. Last quarter, SSS were down 7% representing -10% 2-year SSS, with August marking the peak pain month as ~80% of stores were impacted with some stores fully closed. China’s comps did accelerate in the month of September on a 1-year and 2-year basis, but management warned that the recovery will not be linear.”
UBS would comment that underlying China 2-year sales trends likely improved sequentially given stronger October trends, although they still expect potential downside to consensus given COVID variant pressures. “We expect weaker F2QTD trends given recent lockdowns in major cities (Xi’an 12/22-1/24; increased Beijing restrictions), w/ increased restrictions ahead of the Winter Olympics. But we believe trends will improve once gov’t restrictions ease and consumer sentiment strengthens.” Also, they point to recent Evidence Lab data analysis that suggests a moderation in app trends.
However, one breath of fresh air surrounding China is recent commentary from other blue-chip companies. For example, on their earnings call in late-December, Nike (NKE) said, “Season-to-date holiday retail sales across the total market have trended more favorably. We see encouraging signs in Greater China. And while inventory supply has been a major disruption in the marketplace, we continue to expect fiscal ‘22 to be a year of recovery. Having said that, we expect to see sequential improvement from here, beginning in the third quarter.”
Then, last month, Apple (AAPL) CEO Tim Cook said, “I’ll stay away and let other people be the economist and make the macro determinations. But what we’re seeing there was super impressive with all-time revenue records and a record number of upgraders and strong double-digit growth in switchers on iPhone, which is very important to us. And as I’ve mentioned before, we had the top 4 selling phones in urban China. And so there’s a lot of good there.”
Finally, the company’s Rewards program should continue to show growth as per BofA, in Q4, 51% of US tender for company-operated stores was generated by 90-day active Rewards members, indicating that loyalty membership is a meaningful source of revenue. “Starbucks’ accumulated dataset of 100s of millions of transactions provides the foundation to predict – and incentivize – behaviors for the 25 mm active members of its US loyalty program in ways that are out of reach for most consumer companies. Membership growth is a proven leading indicator of demand growth (~80% correlation between membership growth and two-year SSSG for the years 2014 through 2019). Based on this historical relationship, the 28% membership growth in 4QF21 (ended September) would imply a 15% two-year comp, equivalent to a 21% one-year. While the impact of the Omicron COVID variant is an unknown, the underlying trend is impressive.”
BofA has found that app usage as measured by growth in Daily Average Users is highly correlated with membership growth. In Q4, DAU growth slowed sharply from Q3’s elevated rate – when it was lapping COVID-depressed numbers in Q3 2020 – but rebounded in Q122 (ended December).
