Starbucks' Comparable Sales Look To Have Bottomed — But What's Next?

While Baird analysts said Starbucks Corporation SBUX's fourth-quarter results disappointing, given that a slight comps shortfall led to an EBIT miss.

The set-up feels better from this point forward, analyst David Tarantino said in a Thursday note. 

Baird maintained its Outperform on the shares of Starbucks and lowered its price target from $70 to $66.

At the time of writing, shares of Starbucks were rallying 2.81 percent to $56.41 after slipping moderately on Thursday in reaction to the Q4 results.

Pulling Back Targets

The pro forma EPS of 55 cents came in slightly below Tarantino's expectation of 54 cents, but in line with the consensus, with earnings supported by interest/other and tax rate lines. The EBIT missed estimates by 6 percent, as revenues eased 0.2 percent compared to the consensus expectation for 1.7 percent growth, Tarantino said. (See Tarantino's track record here.) 

Global comps were up 2 percent on a reported basis — helped by a 1-percent increase in traffic — although below expectations of 4 percent growth, Tarantino said. Excluding the drag from hurricanes, the analyst said comps rose 3 percent, roughly in line with expectations for 3.2 percent growth.

Playing along with expectations, Baird noted that Starbucks revised its longer-term targets, with the annual EPS growth target now at 12 percent compared to the 15-20 percent the firm initially estimated.

Starbucks' revenues are expected to increase in the high-single-digit range rather than by the 10 percent-plus growth expected earlier, Tarantino said Comps are expected to increase by 3-5 percent.

"The philosophy underpinning this outlook will include continued investments in growth initiatives, balanced by a heightened focus on controlling costs and streamlining the business," Tarantino said. 

'An Attractive Entry Point'

Baird views Starbucks' guidance as prudent, helping to remove the overhang on the stock. The new guidance continues to place the company in the top quartile of revenue and EPS growth among large-cap consumer names, Tarantino said. 

Starbucks' initial 2018 guidance calls for an EPS of $2.30-$2.33 on comps growth of 3-5 percent, according to Baird. The Street estimates earnings per share of $2.35 for the year. Starbucks' confidence in guiding fiscal year first quarter comps to 3-5 percent, based on recent momentum and sales-driving initiatives, is encouraging, Tarantino said. 

Updating its model, Baird lowered its 2018 EPS estimate to $2.32 and introduced a 2019 estimate of $2.60.

"With the bar reset and with SBUX retaining a scarce growth profile, we believe current/prospective levels represent an attractive entry point on the stock," the analyst said. 

Related Links: 

Things That Stood Out In Starbucks' Q4 Report 

Dan Nathan's Starbucks Trade