Starbucks' quarterly results reassure investors with a 'show me story'

Published Thu, Nov 2 20235:36 PM EDT

Starbucks (SBUX) delivered an upside surprise with its fiscal fourth quarter on Thursday, showing strong comparable-store sales growth and excellent margin expansion — and restoring investor confidence in the coffee maker's ability to attain its long-term targets. Revenue for the three months ended Oct. 1 rose 11.4% year-over-year, to $9.37 billion, beating analysts' estimates of $9.29 billion, according to LSEG. Adjusted earnings per share (EPS) increased 39% from the same period last year, to $1.06, exceeding analysts' predictions of 97 cents per share, LSEG estimates showed. The better-than-expected quarter and strong guidance for fiscal year 2024 sent shares of Starbucks roughly 10% higher Thursday, to close at $100 apiece. Bottom line After Starbucks in August reported a small comparable sales miss in North America for its fiscal third quarter, a narrative took root that the company was facing the beginning of a broader slowdown. Investors feared that the coffee maker's long-term targets of 10% to 12% revenue growth and 15% to 20% earnings growth were in jeopardy. At the time, CEO Laxman Narasimhan vigorously defend those targets, pointing to the strength of the brand and productivity-driven margin expansion. But the market didn't fully believe him, which is why we called the stock a "show me story." And as the market lost confidence in the targets, Starbucks' stock price fell to $90 a share by the start of October — when we most recently added to our position — down from around $100 in August. But on Thursday following the results, investors heard a much more compelling story from Starbucks — forcefully pushing back against the bear case. The power of Starbucks' brand is driving strong traffic and sales growth, despite the uncertain macroeconomic environment. Management also has a credible plan in place to progressively expand margins in the years ahead. The company said Thursday that it's working on an additional $3 billion savings program and efficiencies it expects to unlock in the next three years, mostly as a result of improvements to the supply chain. Today's 10% pop in the stock is an example of what happens when a "show me story" delivers, and we think more gains are in the stock's future. As such, we reiterate our 1 rating , meaning we would be buyers of Starbucks stock at these levels. Quarterly commentary Comparable-store sales in North America in the fiscal fourth quarter grew by 8% on an annual basis, beating analysts' estimates of 7%. Total sales for the region increased by 12.5% year-over-year, to $6.9 billion. More importantly, store profitability was impressive, as operating margins expanded 460 basis points from last year and 150 basis points sequentially, to 23.2%. Starbucks cited continued investment in its employees, equipment, supply chain and technology as reasons behind the productivity-driven margin expansion. In short, increased operational efficiencies are fueling sales growth. Pricing was a tailwind, too. One example of a productivity enhancement is Starbucks' new portable foam for handling cold beverages, which it recently rolled out at all its U.S. stores. This new technology has lessened the strain for Starbucks' in-store employees and helped them meet the high demand cold beverages Believe it or not, cold beverages have become more popular than hot drinks at the coffee chain. In the U.S., comparable sales increased 8%, with a 6% increase in ticket, or spending, and 2% growth in transactions. Starbucks' U.S. comps were better than the 7% expected and an uptick from the third quarter, as well. Starbucks also saw solid growth in its 90-day active rewards membership program, which increased to nearly 33 million customers, from 31.4 million last quarter. Comparable sales at the international segment increased 5% on annual basis, missing estimates of about 6.7%, as total revenue increased 11.4%, to $1.98 billion. Margins expanded year-over-year by a meager 300 basis points, to 15%. However, the bright spot at the international segment was China, which once again performed better than feared. Revenues increased 8% from last year and 2.2% sequentially, to $840.6 million, with comparable store sales up 5%, beating estimates of 4.7%. Starbucks added 326 stores in China last quarter, bringing its total count to 6,806. Starbucks has a goal of opening nearly 1,000 net new stores every year in the country, reaching 9,000 stores by 2025. Guidance For fiscal year 2024, Starbucks expects global comparable sales in the range of 7% to 9%, which is slightly better than Wall Street's 6.9% consensus estimate. In the U.S., comps are expected to grow 5% to 7%, roughly in line with the 6.1% consensus figure. China comps are expected to grow 5% to 7%, as well. Total revenue growth is expected to be in the low end of management's 10% to 12% range, which is about in line with a consensus estimate of 10.4%. On the bottom line, non-GAAP (generally accepted accounting principles) EPS are expected to grow 15% to 20%, ahead of expectations for a 14.7% growth rate. Lastly, Starbucks expects global new-store growth of about 7% in fiscal 2024, with 4% more stores in the U.S. and 13% more stores in China. Notably, Starbucks made a slight tweak to its longer-term growth algorithm. At its investor day event last year, Starbucks had introduced three-year financial targets of 7% to 8% comp growth, 10% to 12% revenue growth, and 15% to 20% EPS growth. But the company walked back those goals slightly Thursday, and now expects comp growth of 5% or more, revenue growth of 10% or more, and EPS growth of 15% or more over the same period. The adjustments could be conservative revisions on the part of CEO Narasimhan, who recently took over from Howard Schultz, the architect of the initial three-year targets. Regardless, we aren't worried, as the new estimates create 'under-promise, over-deliver' opportunities down the line. (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 . 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A Starbucks logo at a location in New York on Aug. 17, 2023.

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