Starbucks Corp (NASDAQ:SBUX) Earnings Model
Author: Xavier Raju, Published: October 24, 2021 Category: Earnings Preview (Prior to the F4Q2021 SBUX Results)
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Notes From the Model Developer: With regards to the Comp-Stores Sales growth rate, although I wish to move in the direction of the management, I am not optimistic so as to use the upper range of their Americas growth rate of 25%. However, I wish to use mean of the ranges, i.e., (25%+22%)/2 = 23.5% [F4Q21E] & (5%+4%)/2 = 4.5% [F1Q23E to F4Q24E]. The key reason behind this assumption is to maintain a margin of safety while maintaining a bullish optimism in terms of SBUX's growing revenue. The two principles behind my rationale for a Margin of Safety are:
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- The proliferation of mutated versions of COVID-19. Though the Delta variant has declined, the WHO and other governments have reported the rise in the TRIAD variants. Therefore, I foresee a series of short-term lockdowns in various economies, especially the growth markets, in order to curtail its spread. I expect this occur over between now and F4Q24E.
- At the same, I would also like to make a provision for possibility that the growth trend or the post-COVID recovery stays on track. Given the above two points factoring both the negative and positive effect, I have taken the mean of both ends of the comp-stores growth rate.
Based on statistics from the UNCTAD, the % change in Gross Merchandize Value for a list of comparable companies after leveraging e-commerce has been a significant uptick. Given that SBUX is making strategic efforts to increase its online presence and the fact that the company has 10 Million downloads already only on the Play Store, I am of the strong opinion that app usage will boost the operating margins by an increasing percentage over the next few years - I have therefore reduced the Store Operating Costs by 1.5%, 2.0% and 2.5% in a phased manner in order to reflect the same assumption. The main reason for the boost in operating margins would be the fact that the cost to service customers that would otherwise purchase in-store would now reduce and new section of customers would be added to the SBUX customer base through the e-commerce channels. This way the company's goals of increasing 'Sales Leverage' under their 'Growth at Scale' agenda is also met.
Multiple-Based Valuation: I used the Next Twelve Month PE Ratio Average because is a fair and more reliable figure serving as an ideal predictor of future expectations of the market. This is mainly because, over the next 12 months SBUX will mature more from its COVID related slump and have both highs and troughs that would even out over the next 12 months and therefore this average, in my opinion, serves as the perfect predictor for future estimations. Post this twelve month period, I expect a bullish market more affirmatively than I would for the next 12 months given the positive effects of its trajectory of recovery. Which means there could be a higher PE ratio post the next 12 month period, so to also be fair to the company itself I am of the opinion that the NTM PE Average is most applicable.
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.