Will Strong Comps Help Starbucks (SBUX) Beat Earnings in Q3?

Starbucks Corporation SBUX is set to report third-quarter fiscal 2014 results on Jul 24, after the market closes. Last quarter, the company delivered in-line results. Let's see how things are shaping up for this announcement.

Factors to Consider this Quarter

Starbucks' strong U.S. comps in the second quarter despite an unusually harsh winter in most parts of the country caught investors' attention. Europe and Asia/Pacific also did well in the quarter.

Moreover, Starbucks raised its full-year earnings outlook and expressed a bullish overall tone for the second half based on the healthy first-half performance. We believe strong comps, food/beverage innovations, lower food costs and lower operating expenses should boost profits in the third quarter. However, the fourth quarter is expected to be stronger than the upcoming third quarter.

In addition to food/beverage innovations, loyalty program and single-serve products, we believe Teavana tea, La Boulange bakery items, Fizzio handcrafted cold carbonated beverages and Evolution Fresh juices could emerge as meaningful top-line growth drivers in fiscal 2014. Fizzio sodas were launched across 3000 U.S. stores last month.

However, a major concern for Starbucks in upcoming quarters would be the increasing coffee costs. In fiscal 2014, with 100% of the company's coffee needs being hedged, coffee costs are expected to be lower than 2013. However, in fiscal 2015, though more than 40% of its coffee needs are locked at favorable prices, the recent record-high coffee prices are a growing concern. Coffee prices are at a record high so far this year due to the increasing prices of Arabica coffee since January as a result of drought in Brazil which produces about one-third of the world's coffee. In fact, last month, Starbucks raised prices of some of its coffee drinks as well as packaged coffee products in response to the rising coffee costs.

Earnings Whispers?

Our proven model does not conclusively show that Starbucks is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP is 0.00%.

Zacks Rank: Starbucks' Zacks Rank #2 (Buy) when combined with a 0.00% ESP, makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies in the restaurant sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Chipotle Mexican Grill, Inc. CMG, with an Earnings ESP of +0.98% and a Zacks Rank #2.

Domino's Pizza, Inc. DPZ, with an Earnings ESP of +1.54% and a Zacks Rank #2.

Buffalo Wild Wings Inc. BWLD, with an Earnings ESP of +5.04% and a Zacks Rank #3 (Hold).

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