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Starbucks Corp (NASDAQ:SBUX) Earnings Model  

Author: Michael Pesenti, Published: July 23, 2019 9:50am Category: Earnings Preview (Prior to the F3Q2019 SBUX Results)

Model Summary: This model is driven by changes in net total new stores added and comp store sales, primarily in the China-Asia-Pacific (CAP) region. I am forecasting a beat on management’s target for stores added on the premise of the new market entrant, Luckin Coffee, providing impetus for Starbucks to ramp up its presence in the region to maintain its market share. I also expect strong comp store sales growth in the CAP region due to the rising popularity of coffee in China.
Store Expansion: Since I am expecting a greater-than-anticipated emphasis on store expansion in the CAP region, I am using a combination of both consensus estimates, as well as the historical trend of error in managerial guidance to predict store expansion in future quarters. In recent years Starbucks has hit its goals for store expansion in the Americas, while slightly underestimating the proportion of licensed stores added in managerial targets. Comments from management point to the idea that this was due to an increasing cost of construction, and lack of desirable real estate available for lease. This trend that has not significantly changed since 2018, so this forecast places an emphasis on licensed store expansion in the US. For the past 3 years, management has targeted and achieved a goal of around 2100-2300 net new stores per year globally. In the absence of any significant macroeconomic events that would directly impact Starbucks’ ability to open new stores globally, my model estimates that Starbucks will continue to hit its expansion goals in the U.S. and EMEA.
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One of the key assumptions made in this earnings forecast is higher-than-anticipated store growth figures in the China-Asia-Pacific (CAP) region. The success of the Chinese chain Luckin Coffee will impact the growth of Starbucks in a manner atypical of a competitor. Luckin is focusing on selling a cheaper, lower-end coffee product, and is aggressively marketing to Chinese consumers through various promotions to incentivize more frequent coffee purchases. With China historically being a “tea culture” as opposed to a coffee drinking one, Luckin’s expansion will assist Starbucks in new customer acquisition as new Chinese coffee-drinkers graduate to higher-end coffee products. Starbucks has already seen success in China based on its tea offerings, and it is likely that Starbucks will pursue an aggressive store expansion strategy to optimize its competitive position as the long-term growth in Chinese coffee drinkers unfolds. For these reasons, I have adjusted the added store figures in CAP to reach a 5% annual growth rate in FY2019. My model estimates have this trend continuing into the forecast for FY2020, using the average of the previous 4 quarters to predict quarterly store growth in the region, which I am projecting will reach 4.61% in 2020.
Comp Store Sales in the CAP Segment: On the front of CAP comp store sales, it is unlikely that the competitive environment will negatively impact Starbucks’ ability to retain customers, considering it appeals to a different market segment than its competitor Luckin. Additionally, Luckin’s customer acquisition strategy centers around a long initial period of unprofitability, driven by deep customer discounts and promotions. When these unsustainable discounts end, the price gap will close between Starbucks and Luckin, and comp store sales will begin to increase. Starbucks has been consistently improving its customer experience in China through initiatives such as redesigned stores and more convenient delivery options. Because of the gradual spread of the “coffee-culture” in Asia, and the closing of the price gap between Starbucks and its competitors, I am forecasting an increase in comp store sales in CAP in FY2019, and a larger increase in FY2020.

SBUX Earnings Model (Michael Pesenti).xlsx
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​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.
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