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Below-Line Items Lower Starbucks (SBUX) Profits in Q3, but Valuation Remains Compelling - RBC Capital

October 31, 2014 10:23 AM EDT
Get Alerts SBUX Hot Sheet
Price: $91.39 -0.12%

Rating Summary:
    21 Buy, 25 Hold, 1 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 13 | Down: 11 | New: 11
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RBC Capital affirms Starbucks at Outperform with a price target of $88 following the company's Q3 report late Thursday.

Analyst David Palmer noted that EPS of $0.74 and revenue of $4.18 billion compared with the firm's estimates of $0.75 and $4.27 billion.

While foot traffic may have slowed in October, Palmer sees innovation and digital marketing helping the cause. The analyst commented, F4Q14 Americas same-store-sales (SSS) growth of 5% fell shy of our 6% estimate. Investments in food drove increased ticket (4pp) but traffic growth of 1% was disappointing. In addition, early reads from our consumer panel suggest October sales trends are slightly below 5%. Slightly weaker fall trends may be partly due to a lack of new product news (e.g. repeat Pumpkin Spice Latte) and substitution effects from iPhone 6 purchases. That said, we model F1Q15 Americas SSS growth of 5%, as we believe corrective measures (e.g. LivingSocial deals, Praline Latte, "Starbucks for Life") will stimulate traffic as others have in the past. We also believe cost initiatives (e.g. waste reduction) will drive EPS growth in 2H15 as coffee costs turn unfavorable. Currently, two-thirds of Starbucks' FY15 coffee needs are locked.

Channel development in China, Asia-Pacific (CAP) and EMEA exceeded expectations. Palmer notes, SSS growth was 5% for both the CAP and EMEA divisions. EMEA SSS was the strongest in recent history, while margins reached double digits for the first time. Additionally, traffic growth of 6% in the CAP segment was inline with that of the prior quarter. Channel Development profit growth (+34%) was as strong as expected given favorable coffee costs and recent price increases.

Starbucks is trading for about 23 times expected earnings, from 29 times last year. Palmer sees a long-term growth grate of about 17 percent (from 19 percent), but believe the 6 point P/E difference makes up for this.

For an analyst ratings summary and ratings history on Starbucks click here. For more ratings news on Starbucks click here.

Starbucks closed at $77.32 yesterday.



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