After 6% Drop This Year, Pricing Growth To Bolster Starbucks’ Q4

[Note: Starbucks
SBUX
’ fiscal year ended in early October]

Starbucks stock (NASDAQ
NDAQ
: SBUX), the world’s leading roaster, marketer, and retailer of specialty coffee worldwide, is scheduled to report its Q4 2023 results on Tuesday, November 2. We expect SBUX stock to trade higher with revenues and earnings beating expectations slightly in its fourth-quarter results. The company’s Q3 operating margins expanded from 15.9% in 2022 to 17.4% in 2023, driven by sales leverage, pricing, and productivity improvement. This compares to operating margin growth of 14.5% in Q1 and 14.3% in Q2 2023. Starbucks’ long-term operating trends outlook is bright as it capitalizes on increasing customer satisfaction across its selling footprint. According to the Q3 results, China’s revenue grew 51% when compared to a soft comparable which included lockdowns. There are signs that China’s coffee consumption is on the rise, which will help drive the chain’s growth. Furthermore, Starbucks plans to invest significantly in the region to enhance its digital capabilities and accelerate the rewards program there. For the full-year 2023, the company expects revenue growth of 10% to 12%, and EPS growth of 16% to 17%.

SBUX stock has seen a decline of 15% from levels of $105 in early January 2021 to around current levels, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period. However, the decrease in SBUX stock has been far from consistent. Returns for the stock were 9% in 2021, -15% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 7% in 2023 – indicating that SBUX underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could SBUX face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Our forecast indicates that Starbucks’ valuation is $109 per share, which is almost 17% higher than the current market price. Look at our interactive dashboard analysis on Starbucks Earnings Preview: What To Expect in Fiscal Q4? for more details.

(1) Revenues expected to beat consensus estimates slightly

Trefis estimates Starbucks’ Q4 2023 revenues to be around $8.8 Bil, marginally higher than the consensus estimate. The coffee king’s adjusted revenue rose 13% y-o-y to $9.2 billion in Q2, including a 10% increase in global comparable sales. The chain posted a healthy balance between rising customer traffic and increased spending, too. The average ticket was up 4% and transactions were up 5% during the quarter. There are now 31.4 million active U.S. loyalty members, a 15% y-o-y increase. The company has nearly 37,222 stores as of Q3, and half of the stores are located in international locations. But by 2030, the goal is to have 55,000 locations running globally – of which China will be a major growth market. The important question here is can the brand continue to expand since it is already ubiquitous? The coffee giant’s management could likely be overly optimistic about its long-term expansion prospects. For the full year 2023, we expect Starbucks Revenues to grow 12% y-o-y to $36.1 billion.

(2) EPS is also likely to beat the consensus estimates marginally

Starbucks’ Q4 2023 earnings per share is expected at 96 cents per Trefis analysis, slightly above the consensus estimate. Q2 adjusted EPS was $1.00, up 25% from the prior year. The company’s consolidated non-GAAP operating margin jumped to 17.4% of sales from 16.9% a year ago. The margin increase was driven by sales leverage, pricing, and productivity improvement.

(3) Stock price estimate higher than the current market price

Going by our Starbucks Valuation, with an EPS estimate of around $3.45 and a P/E multiple of 31.6x in fiscal 2023, this translates into a price of $109, which is almost 17% higher than the current market price.

It is helpful to see how its peers stack up. SBUX Peers shows how Starbucks’ stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

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