On Dec 26, we maintain a Neutral recommendation on Starbucks Corporation (NASDAQ:SBUX), due to its growing momentum. However, we choose to remain on the sidelines regarding the stock until we witness sustained recovery in the European and Channel Development business.
Why the Reiteration?
Starbucks is one of the most recognized coffee brands in the world. It is strengthening its product portfolio with significant innovation around at-home coffee, refreshment, health and wellness, tea and enhancing core food offerings. Further, the company boasts of successful digital, card, loyalty and mobile capabilities. Also, its Americas business has witnessed a substantial turnaround since the last couple of years due to beverage innovations, expanded food offerings and operational improvements. Moreover, the brand is gaining popularity with consumers across Asia as the company continuously expands its store base outside the U.S.
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However, the coffee giant’s fourth-quarter fiscal 2013 results were soft. The company managed to meet the Zacks Consensus Estimate for earnings but missed the same for revenues. Earnings grew 37% year over year driven by margin expansion. New store openings, strong comps in the U.S., traffic gains in Europe and improvement in Channel Development business drove 13% top-line growth in the quarter.
However, Starbucks’ fiscal 2014 earnings outlook fell short of expectations, slightly lowering share price. For fiscal 2014, the company expects revenues to grow 10% or higher, compared to prior expectation of 10%–13% growth. Adjusted earnings are expected to range between $2.55 and $2.65 per share which fell short of the Zacks Consensus Estimate of $2.67.
Following the muted outlook for 2014, estimates were largely revised downward. The Zacks Consensus Estimate for 2014 decreased 0.8% over the last 60 days.
Moreover, Starbucks is facing challenges in its European business due to the region’s poor economic conditions, high unemployment and fragile consumer confidence. Though the transformational initiatives are gaining traction, we would prefer to remain on the sidelines until we witness sustained improvement. Further, revenues from the company’s CPG business slowed down in fiscal 2013 due to stiff competition in the packaged coffee market resulting in lowered pricing.
CPG revenues are expected to return to double-digit growth in fiscal 2014 driven by volume growth from recent price reduction, innovation, international expansion and an accelerated agreement with partner Green Mountain Coffee Roaster, Inc. (GMCR). Until we see sustained improvement in Europe and the CPG business rebounds, we prefer to be on the sidelines.
Other Stocks to Consider
Starbucks carries a Zacks Rank #3 (Hold). Better-ranked restaurateurs include Burger King Worldwide, Inc. (BKW) and Cracker Barrel Old Country Store, Inc. (CBRL). Both these stocks carry a Zacks Rank #2 (Buy).