Starbucks’ (NASDAQ:SBUX) third-quarter earnings topped the Zacks Consensus Estimate, but revenues fell short. Earnings dipped year-over-year, but revenues rose due to greater U.S. comparable sales.
The coffee chain’s shares rose 1.5% in after-hours trading on August 2. Strong U.S. comparable sales lifted investor morale despite inflationary pressures and China’s poor performance. Growing constraints in China hurt Starbucks’ international division, but its U.S. recovery was encouraging.
Howard Schultz, the interim CEO, said, “We have a clear line-of-sight on what we need to do to reinvent the company, elevate our partner and customer experiences and drive accelerated, profitable growth all around the world.”
Starbucks Earnings, Revenues, and Comps
Starbucks announced an adjusted EPS of $0.84, 9.1% above the Zacks Consensus Estimate of $0.77. However, adjusted EPS was 15.2% lower than the $0.99 reported in the prior-year quarter.
Quarterly revenues of $8,150.1 million were 0.9% below than expected. However, top-line growth was 9.7%. Solid U.S. revenue and great global performance drove the increase. New U.S. company-operated stores (part of NAFTA) performed well.
Global comparable store sales rose 3% year-over-year. The upside was driven by a 6% gain in average tickets and a 3% drop in similar transactions.
Starbucks added 318 shops in the third quarter, bringing the total to 34,948.
Starbucks price, consensus, EPS surprise
Non-GAAP operating margin for the fiscal third quarter was 16.9%, down from 20.4% the year before. Inflationary pressures and higher store partner wages and benefits drove the downturn. Reduced Chinese traffic also hurt. Higher North American prices partially countered this.
North America, International, and Channel Development are Starbucks’ reportable segments.
North America’s net revenues were $6,058.4 million, up 13% year-over-year. The segment grew 9% from company-operated comparable store sales, new stores, and licensed store sales.
North American operating margin was 22%, down from 24.3% a year before. The reduction was caused by inflationary pressures, greater training expenses, and investments in retail store partner wages. Pricing partially offsets these.
International net revenues were $1,584.7 million, down 6% year-over-year. Comparable store sales fell 18% due to COVID-19 restrictions in China. New shop openings, better product sales, and royalty revenues offset the decline. In the fourth quarter of fiscal 2021, Korea converted from a joint venture to a fully licensed market.
The segment’s operating margin fell 1,090 bps to 8.5%. COVID-19 limits in China, investments in strategic initiatives, store partner wages and perks, and greater profit and distribution costs from a sales mix shift are responsible for the downside. Sales leverage in markets outside China partially countered this.
China’s third-quarter comps fell 44% year-over-year. Average tickets fell 1% and transactions dropped 43%. China continues to fight COVID resurgences and endures lockdowns.
Channel Development’s net revenues rose 16% year-over-year to $479.7 million. Starbucks’ ready-to-drink and Global Coffee Alliance businesses grew.
The segment’s operating margin fell by 1,220 bps to 40%. The reduction was caused by inflationary pressures and a business mix adjustment at the North American Coffee Partnership joint venture.
Balance sheet
Starbucks concluded the third quarter with $3,177.5 million compared to $6,455.7 million on October 3, 2021. Long-term debt was $13,930.8 million on July 3, 2022, up from $13,616.9 million on October 3, 2021.
The company declared a $0.49 quarterly dividend. On August 26, 2022, stockholders of record will get the dividend.
Outlook for 2022
Starbucks’ management has halted guidance for Q4 due to China’s uncertainty, rising prices, and planned investments. The company predicts a tough fourth quarter.
At its Investor Day in September, Starbucks will present an update on its business forecast for fiscal 2023.
Featured Image: Megapixl @Artas101
