Starbucks Corp (NASDAQ:SBUX) Earnings Model
Author: Abhishek Pathania, Published: October 24, 2021 Category: Earnings Preview (Prior to the F4Q2021 SBUX Results)
|
| ||||
Notes From the Model Developer: Research on Restaurants and bars industry shows concerns of high wages demand, shortage of labor and high quit rates in recent times. On top of that, the ongoing unionization battle at Starbucks is likely to heat up and impact the financials in the coming quarters. I, thereby, anticipate an increase in Operating expenses (wage hikes etc.) and a reduction in sales/revenue (store closures etc.).
Recent Suez Canal incident has resulted in supply chain issues in multiple industries. Thus, the disruption of supply of coffee from Arab coupled with lower production in Brazil will start unfolding in coming months. It will result in the overall reduction of revenue and increase in product and distribution costs. Though this issue will be mitigated to some extent by alternative suppliers, it will still have impact.
I also believe the anticipation regarding the Chinese expansion is optimistic and the projected growth will be realized at a slower pace than suggested. Factors such as increasing competition from local players, different customer behaviors etc. will contribute to it. To take that into consideration, I have reduced the revenue growth rate for the next fiscal year and then tied it with management's expectation.
Recent Suez Canal incident has resulted in supply chain issues in multiple industries. Thus, the disruption of supply of coffee from Arab coupled with lower production in Brazil will start unfolding in coming months. It will result in the overall reduction of revenue and increase in product and distribution costs. Though this issue will be mitigated to some extent by alternative suppliers, it will still have impact.
I also believe the anticipation regarding the Chinese expansion is optimistic and the projected growth will be realized at a slower pace than suggested. Factors such as increasing competition from local players, different customer behaviors etc. will contribute to it. To take that into consideration, I have reduced the revenue growth rate for the next fiscal year and then tied it with management's expectation.
Multiple-Based Valuation: I believe that Starbucks will trade at a lower than average PE multiple due to stated aggravating micro and macroeconomic conditions and indication of imminent market correction. I have assumed it to be 31x, which is towards the lower end of last 3- month average of 31.4x. I also compared it with the peers in the industry and Starbucks is trading towards the higher end in the group. Another indication of it moving towards the average in future.
ERP Model Assumptions: Due to recent rise in inflation, the fed will be forced to taper securities in aggressive manner soon and increase the Fed funds rate. With debt ceiling lurking, I believe it to be as imminent as next quarter (1st of 2022). The yield curve will start to flatten at this point since aggregate demand is likely to reduce and spreads will reduce. Such announcements will also increase market volatility and thereby, resulting in market correction in near future. I have made the following considerations in my ERP forecast:
- Variable 1 - The Federal Funds Rate: According to the Sept 2021 FOMC meeting data, where: the median rate of 2022 is 0.3% and median of 2023 is 1.0%. To incorporate this assumption, I anticipate announcement of increase in fed fund s rate in Q12022 by 15-basis points and same will continue until 2023 end.
- Variable 2 - Treasury Spread: Yields on shorter-term U.S. Treasuries rose on Wednesday, while longer-dated yields dipped following data on consumer prices that further fanned concerns inflation will continue to climb and force the Federal Reserve to act. Therefore, I have decreased the spread input in the ERP Model in Q12022 by 20-basis points and then by another 10 basis- points in Q22022, after that I anticipate an increase in federal fund rates for coming quarters.
- Variable 3 - Equity Market Volatility (VIX): I have increased the VIX input of the model. I believe at the time of the announcement in Q12022 this VIX will increase to 22, and then will be back to the historic average as we proceed.
- Variable 4 - Equity Market Return Projections: Equity market returns will likely be negative during the quarter when the Fed announces an unexpected move to hawkish policy. Therefore, I adjusted the values to -10.00% at the point of the Fed’s announcement of Q12022, and then anticipated a rise back up to 2.75% afterwards.
Disclosure: The author of this article/model has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in the content represent the author’s opinions.