Starbucks delivered solid quarter and guidance, imagine when China fully reopens

Published Thu, Nov 3 20228:48 PM EDTUpdated Thu, Nov 3 20228:49 PM EDT

Club holding Starbucks (SBUX) reported strong fiscal fourth-quarter results after the closing bell Thursday, giving us confidence that demand can endure the softness in the global economy and China's continued adherence to its zero-Covid policy. Revenue advanced to a quarterly record of $8.4 billion, exceeding expectations of $8.31 billion. Adjusted earnings-per-share came in at 81 cents, outpacing the 72-cent consensus. The stock rose more than 2% in after-hours trading as management reaffirmed their long-term guidance provided in September, which members will recall surprised the investors because of how strong it was. Bottom Line While China's rolling Covid lockdowns and restrictions remain a headwind, management's confidence in the long-term outlook for the region was unwavering, with the team commenting on the post-earnings call that their "aspirations for our business in China has never been greater." The company opened its 6,000 th China location in September and continues to target 9,000 location in China by 2025. Taken as a whole, we see no change in our investment thesis. Management's store reinvention plan is working and Starbucks is in a position to deliver strong topline results with enhanced profitability in fiscal year 2023, as China hopefully reopens more fully, currency headwinds abate, and investments in growth are harvested in the back half of the year. When asked on the call how management can be so confident in the face of so much uncertainty, they highlighted the company's highly successful loyalty program, increased customization in drink orders that results in a higher ticket price, and the pricing power they've demonstrated over the past year. However, they did acknowledge that now is not the time raise prices further. One factor we found particularly intriguing was talk on the call about customer demographics. The team said their customers are skewing younger and that "young customer, that Gen Z customer, tends to have significantly more discretionary money at their disposal. And their loyalty to Starbucks has been quite significant and predictable." Companywide Results Same store sales or comps, a key performance metric in retail that removes the effects of currency fluctuations and normalizes for store openings and closings, rose 7% globally in fiscal Q4, on the back of an 11% advance in the U.S. Estimates were for 4% global growth and 8% in the U.S. Internationally, excluding China, saw a double-digit percentage increase. However, international declined 5% when including China, but that was not as bad as estimates for a 7% decline. China sales dropped 16%. Starbucks ended the quarter with 763 net new stores — totaling 35,711 locations globally, 51% of which are company-operated with the remaining 49% as licensed locations. Breaking that down a step further, 61% of all Starbucks stores are in the U.S., with 15,878 locations, and China, with 6,021. Additionally, 90-day active membership of the U.S. Starbucks Rewards loyalty program jumped 16% annually to 28.7 million. Segment Results Starbucks breaks out financials into three key segments: North America, International and Channel Development, where results for at-home and ready-to-drink beverages sold outside of the stores are recorded. Growth rates below are on an annual basis and normalized for a 13 th week in the year ago period. North America sales in Q4 advanced 15% to $6.13 billion, ahead of the $5.93 billion the Street was looking for. Driving the 11% same-store-sales increase noted above was a 10% increase in average ticket prices and a 1% increase in transaction volumes. North America operating income declined to $1.14 billion as the profit margin contracted to 18.6% from 21.8% in the year ago period due to investments in growth as well as increased labor, commodity and supply chain costs. However, the result came in above expectations of $1.05 billion International sales declined 1% to $1.78 billion, missing expectations of $1.88 billion. The decline is attributable to an 11% foreign exchange headwind, the effects of an extra week in the year ago quarter, and ongoing Covid restrictions in China. International operating income fell to $217.6 million, but exceeded expectations of $177 million. The Q4 operating profit margin contracted to 12.2% from 19.7% in the year ago period due largely to China store closures. Channel Development sales grew 16% to $483.7 million, ahead of the $478 million and driven by the Global Coffee Alliance with Nestle and global ready-to-drink business. Channel Development operating income of $244.7 million was better than the $231 million the Street was looking to as the operating margin expanded to 50.6% from 50.1% in the year ago period due primarily to a favorable mix shift. Guidance No surprises here, as we mentioned earlier, with management reaffirming the full-year fiscal 2023 guidance provided at the company's Investor Day in September. Management is targeting 7% to 9% same store sales growth in the U.S. versus a 7% consensus estimate — so a beat at the midpoint. In China, while the first fiscal quarter is expected to be negative, management expects outsized same store sales in subsequent quarters as the 2022 lockdowns are lapped. Adding it all up, management sees global comps in fiscal 2023 coming at the high-end of their 7% to 9% range, in line with expectations for 8.8% global comps. Nearer-term fiscal first quarter (current quarter) global comps are expected to come in "at the low end of the annual guidance range" — so closer to 7% — before expanding in subsequent quarters. That's basically in line with the 6.9% the Street was looking for. Looking at store growth, management sees its U.S. footprint expanding 3% in fiscal 2023, while Chinese locations are expected to grow by about 13%, resulting in a global store growth of about 7%, with over three-quarters of that growth coming from outside the U.S. Along with Channel Development initiatives, the combination of same store sales growth and an expanded global footprint in fiscal 2023 is expected to result in 10% to 12% total sales growth despite expectations for a roughly 3% currency headwind, about in line with what the Street was looking for. As for profitability, management expects global operating margin expansion on a full year 2023 basis, though noted that most of the expansion will occur in the back half of the year as they harvest the benefits of their store reinvention plan and China recovers. Finally, fiscal 2023 adjusted earnings growth is expected to be at the low end of the 15% to 20% long-term range, in line analyst expectations for 15% earnings growth in 2023. Capital allocation Regarding capital allocation, management anticipates fiscal 2023 capital expenditures of about $2.5 billion, above the $2 billion the Street was expecting and reiterated their intention to return roughly $20 billion to shareholders in the next three years between dividends and share buybacks. Management added on the call, "We remain committed to targeting an approximately 50% dividend payout ratio as reflected in the recently announced dividend increase and will also resume our buyback program in fiscal 2023." On that note, the Board of Directors declared a cash dividend of 53 cents per share, payable on Nov. 25 to shareholders of record as of Nov. 11. (Jim Cramer's Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A Starbucks store is seen inside the Tom Bradley terminal at LAX airport in Los Angeles, California.

Lucy Nicholson | Reuters