Starbucks Corp (NASDAQ:SBUX) Earnings Model
Author: Nick Sunderland, Published: July 19, 2019 10:20pm Category: Earnings Preview (Fiscal 3Q2019)
Model Summary: This model extracts all data from company guidance (10K, 10Q, Letter to Shareholders, Annual Report), and Analyst Consensus Estimates derived from Bloomberg, and makes informed estimates with the data aforementioned.
The Story: As a giant in the consumer discretionary sector, Starbucks has numerous strengths. With a loyal domestic customer base, globe-spanning presence, and the ability to perform large-scale business ventures, (such as permitting Nestle to sell its products.), Starbucks has a relative floor of security that makes financial disaster unlikely for the foreseeable future. That being said, Starbucks must contend with economic slowdowns both at home and abroad. This proves tricky given that expansion has been the key focus for Starbucks’ management, risking oversaturation as the consumer’s discretionary income falls. Ultimately, Starbucks does not present significant novel catalysts for growth, opting to remain with its tried and true method of expansion to drive improvements in company free cash flow.
The effects of expansion on Starbucks’ financials have been extensively documented and show healthy improvements in revenue and margin on an annual basis. I deem a neutral rating for Starbucks appropriate not due to skepticism on its financial prospects, but because Starbucks decision to remain with expansion as its primary growth driver means that consensus estimates are likely to be both accurate and have minimal variance. Furthermore, from a long-term investment standpoint, Starbucks shows questionable judgement on its buyback policy. Predictable improvements in company financials alone do not justify the notable 29.30% YTD growth SBUX has experienced. Instead, management’s decision to increase total liabilities by over 257% (outweighing Shareholders’ Equity as a summed value) and direct much of this income toward share buybacks creates an inevitable correction in share value.
Should Starbucks continue to place its eggs in China’s basket despite a slowing economy and rising competition from Luckin, it is unlikely that it will avoid a significant correction from a long-term holding perspective. Starbucks has impressive momentum and dependable means of modest financial growth, making it suitable for short to mid-term investment horizons. However, given macroeconomic trends, a lack of novel catalysts, and ballooning long term debt, it presents significant risks should it be considered for a long-term investment strategy.
The Story: As a giant in the consumer discretionary sector, Starbucks has numerous strengths. With a loyal domestic customer base, globe-spanning presence, and the ability to perform large-scale business ventures, (such as permitting Nestle to sell its products.), Starbucks has a relative floor of security that makes financial disaster unlikely for the foreseeable future. That being said, Starbucks must contend with economic slowdowns both at home and abroad. This proves tricky given that expansion has been the key focus for Starbucks’ management, risking oversaturation as the consumer’s discretionary income falls. Ultimately, Starbucks does not present significant novel catalysts for growth, opting to remain with its tried and true method of expansion to drive improvements in company free cash flow.
The effects of expansion on Starbucks’ financials have been extensively documented and show healthy improvements in revenue and margin on an annual basis. I deem a neutral rating for Starbucks appropriate not due to skepticism on its financial prospects, but because Starbucks decision to remain with expansion as its primary growth driver means that consensus estimates are likely to be both accurate and have minimal variance. Furthermore, from a long-term investment standpoint, Starbucks shows questionable judgement on its buyback policy. Predictable improvements in company financials alone do not justify the notable 29.30% YTD growth SBUX has experienced. Instead, management’s decision to increase total liabilities by over 257% (outweighing Shareholders’ Equity as a summed value) and direct much of this income toward share buybacks creates an inevitable correction in share value.
Should Starbucks continue to place its eggs in China’s basket despite a slowing economy and rising competition from Luckin, it is unlikely that it will avoid a significant correction from a long-term holding perspective. Starbucks has impressive momentum and dependable means of modest financial growth, making it suitable for short to mid-term investment horizons. However, given macroeconomic trends, a lack of novel catalysts, and ballooning long term debt, it presents significant risks should it be considered for a long-term investment strategy.
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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.