Starbucks Corporation (NASDAQ:SBUX) reported stronger-than-expected Q3 earnings, led by higher margins. Further, management remains confident about delivering solid earnings ahead (double-digit growth), reflecting increased sales and continued margin expansion. Conversely, investors have gone cold on SBUX stock, which is down about 1.3% in the pre-market session on Wednesday.
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Further, Starbucks stock has not participated in this year’s recovery rally. It is up about 3% on a year-to-date basis, lagging behind the S&P 500 Index (SPX), which is up approximately 19% during the same period. This shows that investors have turned their backs on SBUX stock.
But before we delve deeper, let’s look at Starbucks’ Q3 performance.
Starbucks Exceeds Analysts’ Q3 Earnings Projection
Starbucks delivered better-than-expected Q3 earnings. Its adjusted EPS of $1 increased 19% year-over-year and exceeded the Street’s projection of $0.95 a share.
Sales leverage, beverage innovation, and pricing and productivity improvement led to a 15.9% growth in its adjusted operating income. At the same time, its operating margin expanded by 50 basis points.
Starbucks’ EPS came ahead of the Street’s estimates. On the other hand, its top line fell short of expectations. The company’s consolidated net revenues increased 12% year-over-year to a record $9.17 billion, missing analysts’ consensus estimate of $9.29 billion.
Nonetheless, the company’s global comparable store sales were up 10%, reflecting a 24% jump in the international markets and a 7% increase in North America.
Growth Guidance Maintained
The company’s management reiterated the full-year revenue growth outlook. Starbucks sees a 10% to 12% jump in its top line in Fiscal 2023, with global comparable sales growth near the high end of its 7% to 9% guidance range.
Moreover, the company expects to deliver solid margin expansion this year and projects EPS growth of 16% to 17%. Also, Starbucks’ management sees progressive margin expansion in the future, led by favorable mix and beverage and product innovation, which unlock productivity gains and offer sales leverage. This implies that the company could continue to grow its earnings at a decent pace (targeting 15-20% annual EPS growth through 2025).
At the same time, the company’s productivity initiatives are creating efficiency in the supply chain and procurement processes, which augurs well for margin expansion and earnings growth in the coming years.
Although the company’s efforts to drive earnings are positive, Stifel Nicolaus analyst Chris O`Cull sees lower sales growth ahead and lowered his EPS projection following the Q3 earnings announcement. The analyst reiterated a Hold rating on SBUX stock on August 1.
Is Starbucks Stock a Buy or a Sell?
Starbucks is poised to benefit from beverage innovation, new store growth, customization, and food attachment. In addition, momentum in the delivery business, productivity gains, and investments in digital sales bode well for future sales and earnings growth.
Nevertheless, macro challenges, uncertainty in China, and overlapping pricing initiatives could hurt its revenue growth rate and, in turn, the company’s earnings.
Wall Street analysts are cautiously optimistic about SBUX stock. It has received 11 Buy and 10 Hold recommendations for a Moderate Buy consensus rating. Analysts’ average price target of $117.33 implies 15.87% upside potential from current levels.
