Starbucks (SBUX), which is a holding of the Action Alerts PLUS charity portfolio co-managed by Jim Cramer, reports results after the close. Investors are expecting a strong quarter, but Starbucks' success hasn't been reflected in its share price. The stock has been trapped in a tight range for the last seven months. Can it percolate?
Back in January, I was bullish on Starbucks, but year to date the stock is up just 1.4%. What happened?
Last quarter, management found a way to reaccelerate growth after a lackluster fiscal 2015 (calendar 2014). The company focused on driving transaction and ticket growth, which drove impressive same store sales. Global same store sales rose 8% and U.S comps were up 9%, which included a 4% rise in traffic.
Mobile order & pay (MO&P) drove the results in the first quarter. MO&P hit a run rate of six million orders per month and exceeding 10% of all transactions at some of its busiest locations. Management think they can continue to drive the number of mobile transactions higher.
In recent months, Starbucks has been getting its food business on track. Lunch and mid-day average transactions are up 30% over the last five years. For same stores sales to continue their ascent, lunch, mid-day refreshment and the snack business have to continue to work. Last quarter, food added 3% to same store sales.
Analysts are looking for earningsper share of $0.39 on revenue of $5.03 billion. The consensus is expecting global same store sales to increase by 6.5% and U.S. comps to increase 7%.
The company should benefit from an extra week in fiscal 2016. For the year, investors think SBUX will report revenue of $21.5 billion, up around 12% and earn $1.89.
Accelerating international expansion, especially in China, Russia and India will be key concerns for investors. Over 70% of its 1,800 new stores will be located outside the United States.
Analysts universally agree that Starbucks is worth $68. With some decent top line growth and share buybacks, earnings should grow from $1.89 to $2.19 next year. But $68 per share is 36x forward estimates, and is a rich premium to Restaurant Brands International (QSR). The QSR group usually trades between 25x and 30x forward earnings. Because of its strong execution, I think Starbucks should begin to break out of its trading range and percolate.