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Starbucks earnings: Investors should prepare for an earnings reset

Starbucks is expected to give a look ahead that will include earnings moderation, but analysts are bullish

Starbucks Corp. is expected to report fourth-quarter earnings on Thursday after the closing bell.

The coffee company SBUX, +0.53% is expected to discuss fiscal 2018 expectations, with RBC Capital Markets analysts expecting a “reset,” given the pressures from wage growth and the company’s technology investments.

RBC now expects fiscal 2018 earnings per share of $2.34, down from $2.37 previously. The FactSet consensus is for $2.35.

Among the items they’ll be listening for are initiatives to give the rewards program a jolt after digital roadblocks, discussion of core beverage growth, and potential same-store sales contribution from the Mercato offerings as it expands into new markets.

Mercato, which is designed to meet a variety of dietary needs, including gluten-free, was launched in Chicago in April.

“As Starbucks likely prepares to reset expectations, our guess is that fiscal 2018 EPS growth could fall towards the lower end of what we expect the company to communicate as it new long-term growth algorithm of 12% to 17%,” analysts led by David Palmer wrote.

Still, analysts are bullish about the company in the long-term, forecasting that fiscal 2019 will reap the rewards of an improved digital ordering system, accretion from the integration of the Chinese business, and more.

“We continue to see stable near-term trends and an attractive valuation level for one of the best large-cap growth stories in consumer,” analysts wrote.

RBC rates Starbucks outperform with a $63 price target.

Starbucks has an average overweight stock rating and average price target of $63.78, according to 33 analysts polled by FactSet.

Here are some things to watch for:

Earnings: Starbucks is expected to report earnings per share of 55 cents, down a penny from 56 cents last year.

Estimize, a software platform that crowdsources estimates from buy-side analysts, hedge-fund managers and others, is expecting EPS of 56 cents.

Revenue: FactSet expects revenue of $5.81 billion, up from $5.71 billion last year.

Estimize expects sales of $5.75 billion.

Stock reaction: Starbucks shares are up 0.7% for the last three months, and up 5% for the last year.

The S&P 500 index SPX, +0.16% is up 4.2% for the past three months, and the Dow Jones Industrial Average DJIA, +0.25% is up 6.4% for the period.

What to watch for:

-Instinet analysts led by Mark Kalinowski lowered their same-store sales estimate to 3% growth from 4%.

“By some measures, same-store sales for U.S. chain restaurants in the period (equivalent to calendar Q3 2017) represented the second-worst quarter of the last five years,” analysts wrote in a note. “While we believe Starbucks posted a respectable number, we believe +3% is a little more likely than 4% for the U.S. (by far the largest component of the Americas segment).”

Instinet rates Starbucks shares buy with a $67 price target.

-UBS analysts led by Dennis Geiger say that despite the potential for earnings moderation, there are other opportunities for long-term growth through food, beverage and digital initiatives in both the U.S. and abroad.

“Future optionality (repurchase, acquisitions, ownership) could represent additional catalysts over time,” analysts wrote. “We believe Starbucks remains one of the highest quality growth companies in large-cap consumer, now trading at a discount to historical relative valuation.”

UBS rates Starbucks shares buy with a $67 price target.

-Instinet highlights the coming rollout of about six bottled beverages, including Frappuccinos made with almond milk in both vanilla and mocha, a test of an Earl Grey Mocha Malt ice cream shake, and a test of whole milk on the nitro tap in a few stores, which could lead to new beverages like the Nitro Pumpkin Spice Latte.


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