Starbucks (SBUX) is proving me wrong.
Throughout the last year, I had real concerns about the company's trending operating margins, as so much went into the company's efforts to drive top-line revenue growth. However, fiscal second-quarter results offered some promise. Now Starbucks' fiscal third-quarter results are showing a new trend with stronger operating income, and subsequent earnings.
I don't like being wrong, but I do like seeing a strong U.S. company doing well.
Fiscal Third Quarter
Total comparable sales across the globe increased 6% in the June quarter. The manner of the growth was balanced between a 3% increase in transactions, and 3% growth in average ticket.
Domestic sales were threatening to undermine expansion in Asia. The fiscal third quarter displayed renewed strength domestically. Americas comparable store sales increased 7%, with a 4% higher average ticket, and 3% growth in transactions.
In the United States market alone, comparable store sales increased 7%. Transactions rose 3%. I consider transaction growth to be very important for Starbucks' long-term prospects. Average ticket can only go so high without alienating demand.
Overseas, Chinese comp sales rose 6%, with a 2% increase in transactions. China/Asia Pacific, as a whole, saw comp sales growth of 5%, with 3% increases in ticket, along with a 2% advance in transactions.
The EMEA segment (including Europe, the Middle East, and Africa) is a definite weak spot. Comp sales did grow by 3% in the quarter, but transactions were flat, with weakening operating margins.
Overall, I have to say that Starbucks is doing remarkably better. Total net revenues increased 8.1% to $6.82 billion. Operating income grew 8% to $1.12 billion.
It is worth noting that pretax income included a $601.8 million net gain from divestitures. Nonetheless, earnings before income taxes were up 63.3% to $1.67 billion. Despite 73.7% higher income taxes expenses, Starbucks reported net earnings of $1.37 billion. That's a 61% increase year over year.
That income breaks down to $1.12 per diluted share compared to $0.61 per diluted share a year ago. On an adjusted non-GAAP basis, earnings were $0.78 per diluted share. That would be a 26% increase over 2018's fiscal third-quarter non-GAAP earnings.
New guidance suggests that the company will finish fiscal 2019 (September) with much better results than previously forecasted.
Starbucks now expects global comparable store sales to come in at 4%, locking in at the high end of previous guidance of 3%-4%. Consolidated GAAP revenue growth is also expected to now come in at the approximate high range of previous guidance at 7%.
The company is expected to finish the year with 2,000 new stores compared to previous estimates of 2,100. The bulk of these stores will open in China/Asia, with 1,100 in total and 600 planned in China alone.
Earnings on a GAAP basis are expected to be $2.86 to $2.88 per share. That's well above previous guidance of $2.40 to $2.44 per share. Non-GAAP forecasts are relatively similar at $2.80 to $2.82.
I Completely Missed the Run
Starbucks might be my biggest mistake this year. The coffee giant has found renewed strength in its earnings story, and shareholders are getting rewarded handsomely for their patience.
SBUX stock has increased by roughly 50% year to date, making my cautious call a pretty disappointing move. I'm man enough to admit it. I was wrong on the stock.
Moving forward, this largely is about valuation. Based on guidance, SBUX is trading at roughly 34x forward full-year earnings. Historically, SBUX tends to have a P/E ratio in the mid 20's. Therefore, I'm afraid I won't be doing much chasing.
If you missed the run, I think the only real move to make on SBUX is to wait for a correction.