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Anyway, Starbucks laid a big fat egg with its earnings on Thursday. No, the coffee giant isn't in the same boat as Sears (SHLD) or other traffic-starved retailers. But it's not immune to retail's evolution and Wall Street must get that through its big fat skull. It remains too bullish on Starbucks and needs to hit the reset button with its estimates.
A few things that stood out as concerns from the quarter:
- Long-term comp guidance is below the Starbucks norm.
- U.S. comps up 3%. In Starbucks land, that is terrible given its best-in-class mobile platform.
- Operating margins down 360 basis points. Starbucks is in full investment mode in tech and people (see wage inflation). This headwind will not dissipate anytime soon.
Avoid this coffee king for now. Pick up some Funko (FNKO) -- I dug my chat with the CEO today post-IPO.
My Starbucks setup, authored on Monday:
I have caught some serious flack on Starbucks (SBUX) calls before. So I suspect this one won't be any different.
It was back in 2014 when as an analyst I argued Starbucks was having a serious problem processing traffic in its restaurants. After spending weeks visiting Starbucks locations, I reasoned Starbucks kitchens -- and staff -- weren't equipped to handle all of the new demands being put on them by corporate (new mobile initiatives, more complicated food and drinks). As a result, the consumer experience would probably take a hit, same-store sales would slow and more would have to be done to keep employees happy. That has basically played out. While Starbucks has worked to improve these things, more needs to be done around staffing and how kitchens are laid out. Starbucks has to streamline its menu just like Dunkin' Brands (DNKN) and McDonald's (MCD) have done in order to improve throughput and find cost savings.
Now here's the new call that won't win me any fans among sell-side analysts: Starbucks could shock the hell out of uber bullish Wall Street with its results and guidance this coming week. All the writing is on the wall for this to happen. First, McDonald's had a killer quarter on coffee thanks to a push into premium offerings and discounts on drip. Those efforts took a bite out of Dunkin's results, and I suspect it did to a lesser extent at Starbucks. J.C. Penney's (JCP) earnings warning -- and Amazon's (AMZN) blowout quarter -- should remind everyone that retail traffic remained challenging in the third quarter. Starbucks isn't immune to the fundamental shift to online shopping. Sure, it has a best-in-class mobile app but if people aren't leaving their homes to shop, they may not be leaving for a $6 iced coffee. Those are a couple incredibly simple quarterly considerations that could lead to a slight earnings miss. As for guidance, Wall Street just continues to be too bullish in its estimates for Starbucks, with Wall Street looking for 14% earnings growth over the next 12 months. Given Starbucks global traffic trends and another year of employee wage inflation, Starbucks could only be a high-single digit earnings grower next year. I still don't think the market appreciates these factors on Starbucks, despite the stock's stark underperformance vs. the benchmark indices this year.