Shares of Starbucks (NASDAQ: SBUX) were down more than 6% after the company disappointed the market with guidance. As bad as the move is, it is not a signal to run for the hills or start shedding a position. The pullback is a knee-jerk reaction to an as-expected event in which investors secretly hoped for more.
The takeaway from the Q2 report is that the transition to new CEO Laxman Narishman is complete, the company is outperforming consensus targets and the guidance was reaffirmed with growth, improving margins and sustainable capital returns. What this means for investors is a chance to buy into a name at a discount when it should be moving higher.
Starbucks Falls On Robust Report, Solid Guidance
Judging the quality of Starbucks’ Q2 report by the price action, you might think the company whiffed, but it didn’t. The $8.7 billion in revenue is up 14% compared to last year, and it beat the Marketbeat.com consensus by 320 basis points on strength in North America and International markets. North American sales grew by 12% while International grew by 7%, supported by a systemwide 6% gain in ticket counts compounded by a 4% increase in ticket average. On a comp basis, sales are up 11%, aided by adding 464 net new stores in the quarter. Reward membership also supports sales, with active rewards membership up 15% to 30.8 million.
The margin is also good news and is no reason to sell the stock. The GAAP and adjusted operating margins expanded by more than 100 basis points, the adjusted by 130, with the GAAP outpacing adjusted due to the sale of assets. The takeaway is that GAAP and adjusted earnings grew faster than revenue, leaving the adjusted EPS at $0.74 and $0.09 or 1380 bps better than expected.
The guidance is tepid given the Q2 strength, but uncertainties about the economy could have a material impact on GDP, not just Starbucks sales, so reaffirming is a wise choice. Assuming the company can continue to navigate the times as it has, the guidance is likely cautious. Regardless, Mr. Narishman and the company see results at the high end of the range, which is a sign of some strength, if not what the market wanted.
Capital Returns Will Support Starbucks In 2023
Starbucks investors also have capital returns on their side. The company’s dividend isn’t “high yielding” at 1.85% but beats the S&P 500 average; it is growing and compounded by share repurchases. Starbucks has increased its distribution for 12 consecutive years at a double-digit CAGR and is expected to continue at a double-digit pace. The company also repurchased $303 million in shares, or 3 million shares, during the quarter and has 47.7 million left under the current authorization. The 47.7 million shares are worth about 4% of the float and are part and parcel of the distribution growth strategy.
The analysts' activity is mixed following the release, but the takeaway is bullish. The 7 reports on Marketbeat’s tracking page include 2 price target reductions, but they are to levels above the consensus, and the others are all raised to above consensus. This has the consensus at fair value but moving higher, and many new targets are a 10% to 15% premium to it.
The technicals are favorable despite the pullback in price action. The uptrend and Vee recovery that began when Schultz retook the CEO position last year is not over. The pullback returns the price to a solid support level that should produce a bounce. At worst, this market is range bound at current levels, but at best, it will regain its footing and move to new highs by the end of the year. Assuming Mr. Narishman can execute his plans.
