Starbucks Corp (NASDAQ:SBUX) Earnings Model
Author: Kristof Guggenheim, Published: October 27, 2020 9:25pm Category: Earnings Preview (Fiscal 4Q2020)
Earnings Model Assumptions
Americas Net New Stores: I am trying to return to a pre-COVID levels during/after FY2021. I believe Starbucks will continue to add stores specifically with the new kiosk concept. Starbucks will continue to create stores and kiosks. I also have increased my assumption for Net New Licensed Stores. I have America Total Net New Stores beating guidance’s expectation of 38 (338 vs 300).
Comp Stores Sales Growth: Changed to -10% for Q4 FY20 for Americas segment. This assumption would beat the optimistic end of managements Q3 earnings call guidance. I think Starbucks and the market in general will recover faster than most people anticipate. Starbucks has continued to grow its rewards and digital presence which I believe will influence store growth. Management also said that the average revenue per sale has grown due to larger order sizes. I think Starbucks suffered earlier this year with consumer habits changing (i.e. morning commutes) but now they are well positioned to grow in this economic environment. COVID restrictions have been loosening up around the country and I believe that quarterly sales growth will grow faster than consensus anticipates. Assuming perpetual growth of 5% once things have stabilized.
Comp Store Sales Growth (International): I have a Bullish expectation for this segment as well. For Q4 FY20 I increased the growth rate to -9.5%. I have increased the growth rate for FY21 and then lower the growth rate over the out years. China and Japan are huge markets for Starbucks, and they have seen solid recovery over the last few months and management had a very positive outlook regarding their recovery. Personally, I believe that management felt the most confident about their China outlook on last quarter’s earnings call.
VIX: I smoothed recent market volatility over the next 3 quarters until it returned to the historical average. The historical average is 19.00 and I used it for 3 periods then lowered volatility by 50 basis points moving forward. I assume market volatility will return to the average then slowly decline as the economy accelerators.
Resulting EPS Forecast: Non-GAAP EPS of $0.30 and Non-GAAP Net Income of $351M for Q4 FY2020. Non-GAAP EPS of $2.92 and Non-GAAP Net Income of $3.4B for FY2021. My FY2021 expectations exceeds consensus expectations of $2.72. Analysts high EPS forecast for FY21 is set at $3.20. I have a more bullish outlook on the economy and Starbucks compared to consensus.
ERP Model Assumptions
Fed Funds Rate: I am keeping this at the midpoint of 12.5 basis points quarterly. The Fed has been very clear that they look to keep interest rates stable for the foreseeable future. I believe that the rate will be stable until the economy starts to recovery very positively. I am assuming the fed keeps it at 12.5 basis points until early FY22 then increasing the rate by 4 basis points until it hits the cap of 25 basis points. I think Fed will want to keep rates stable to stimulate the economy throughout FY21.
Quarterly Average Spread: With the market recovering faster than anticipated I believe the spread will widen by 15 basis points per quarter. Looking at how the spread has widened after other economic disasters is another indicator of why I believe the spread will widen. The spread also widens whenever there is strong economic progress.
P/E Multiple: I used the FY2021 multiple since I think the effects of COVID should not fully influence future periods. The FY21 estimate gives a much more “normal” view of how Starbucks would perform in a pre-COVID market. I think the market is willing to look past short-term disruption in coming up with valuations like Starbucks.
Price Band: Assuming returns are normally distributed so that 2X Standard Deviation will happen in approximately 95% of observations. This band uses the mean of returns over the last 12 months. This assumption does not account for the tail risk. I used absolute mean monthly return. This assumes that historical returns imply future returns and that they are normally distributed.
Americas Net New Stores: I am trying to return to a pre-COVID levels during/after FY2021. I believe Starbucks will continue to add stores specifically with the new kiosk concept. Starbucks will continue to create stores and kiosks. I also have increased my assumption for Net New Licensed Stores. I have America Total Net New Stores beating guidance’s expectation of 38 (338 vs 300).
Comp Stores Sales Growth: Changed to -10% for Q4 FY20 for Americas segment. This assumption would beat the optimistic end of managements Q3 earnings call guidance. I think Starbucks and the market in general will recover faster than most people anticipate. Starbucks has continued to grow its rewards and digital presence which I believe will influence store growth. Management also said that the average revenue per sale has grown due to larger order sizes. I think Starbucks suffered earlier this year with consumer habits changing (i.e. morning commutes) but now they are well positioned to grow in this economic environment. COVID restrictions have been loosening up around the country and I believe that quarterly sales growth will grow faster than consensus anticipates. Assuming perpetual growth of 5% once things have stabilized.
Comp Store Sales Growth (International): I have a Bullish expectation for this segment as well. For Q4 FY20 I increased the growth rate to -9.5%. I have increased the growth rate for FY21 and then lower the growth rate over the out years. China and Japan are huge markets for Starbucks, and they have seen solid recovery over the last few months and management had a very positive outlook regarding their recovery. Personally, I believe that management felt the most confident about their China outlook on last quarter’s earnings call.
VIX: I smoothed recent market volatility over the next 3 quarters until it returned to the historical average. The historical average is 19.00 and I used it for 3 periods then lowered volatility by 50 basis points moving forward. I assume market volatility will return to the average then slowly decline as the economy accelerators.
Resulting EPS Forecast: Non-GAAP EPS of $0.30 and Non-GAAP Net Income of $351M for Q4 FY2020. Non-GAAP EPS of $2.92 and Non-GAAP Net Income of $3.4B for FY2021. My FY2021 expectations exceeds consensus expectations of $2.72. Analysts high EPS forecast for FY21 is set at $3.20. I have a more bullish outlook on the economy and Starbucks compared to consensus.
ERP Model Assumptions
Fed Funds Rate: I am keeping this at the midpoint of 12.5 basis points quarterly. The Fed has been very clear that they look to keep interest rates stable for the foreseeable future. I believe that the rate will be stable until the economy starts to recovery very positively. I am assuming the fed keeps it at 12.5 basis points until early FY22 then increasing the rate by 4 basis points until it hits the cap of 25 basis points. I think Fed will want to keep rates stable to stimulate the economy throughout FY21.
Quarterly Average Spread: With the market recovering faster than anticipated I believe the spread will widen by 15 basis points per quarter. Looking at how the spread has widened after other economic disasters is another indicator of why I believe the spread will widen. The spread also widens whenever there is strong economic progress.
P/E Multiple: I used the FY2021 multiple since I think the effects of COVID should not fully influence future periods. The FY21 estimate gives a much more “normal” view of how Starbucks would perform in a pre-COVID market. I think the market is willing to look past short-term disruption in coming up with valuations like Starbucks.
Price Band: Assuming returns are normally distributed so that 2X Standard Deviation will happen in approximately 95% of observations. This band uses the mean of returns over the last 12 months. This assumption does not account for the tail risk. I used absolute mean monthly return. This assumes that historical returns imply future returns and that they are normally distributed.
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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.