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The Street Debates Starbucks' Quarter

Starbucks Corporation (NASDAQ: SBUX) reported Tuesday fiscal first-quarter results taht were overshadowed by the concerning coronavirus spread in China where the company has a big presence.

Benzinga · 01/29/2020 21:33

Starbucks Corporation (NASDAQ: SBUX) reported Tuesday fiscal first-quarter results taht were overshadowed by the concerning coronavirus spread in China where the company has a big presence.

The Street attempted to look past any near-term concern to better understand if the stock should be bought at current levels.

SBUX Q1 Performance

Starbucks reported a two-cent EPS beat in the fiscal first quarter at 79 cents while same-store sales growth of 6% came in better than the 5% expected, Wedbush analyst Nick Setyan wrote in a note. The strength was driven by growth in beverages and digital and gains in the AM/PM dayparts.

International same-store sales growth of 1% did fall shy of the 3% the Street expected while China's 3% growth was shy of the approximate 5% growth some analysts were looking for, Setyan wrote. Also, the business in Japan was impacted by transient issues like a typhoon and a higher consumer tax.

Starbucks' earnings report came in solid "as expected" and backed by several encouraging metrics and takeaways, Stifel analyst Chris O'Cull wrote in a note. These include transaction and check growth each came in at 3%, cold beverages continued to perform well, including new seasonal items and the Starbucks Rewards expanded from 17.6 million users last quarter to 18.9 million.

Related Link: Starbucks Reports Q1 Earnings Beat, Addresses Potential Coronavirus Impact

China Concerns For SBUX

Morgan Stanley analyst John Glass wrote in a note Starbucks reported one of its strongest quarters in recent memory. The operating margin rebounded to growth in the quarter after more than two years of declines. However, the coronavirus outbreak in China overshadowed the encouraging results as the country accounts for around 10% of total revenues and more than 10% of pro-corporate expense operating profit.

Glass wrote he isn't expecting any major impact on Starbucks' longer-term earnings outlook from China but this remains subject to change based on new developments.

Similarly, Bank of America analyst Gregory Francfort wrote in a note. Starbucks' store closures in China will notably impact near-term dynamics. The coffee chain will still need to pay labor and rent costs in China which creates a "high negative flow-through." The immediate impact on fiscal second quarter earnings is estimated at eight cents per share, assuming stores stay fully closed for three weeks.

"We continue to rate SBUX a Buy as we look through these challenges but do note elevated levels of risk if the virus spreads or lasts longer than we expect," Francfort wrote.

Tigress Financial Partners' Ivan Feinseth wrote in his daily newsletter that notwithstanding coronavirus concerns, Starbucks is positioned for another "great year" in the country from key growth initiatives. For example, the company recently opened an express retail concept in Beijing and bought an equity stake in a restaurant tech company called Brihtloom.

"I believe further upside exists from current levels and continue to recommend purchase," he wrote.

Ratings And Price Targets

Wedbush maintains at Neutral, unchanged $95 price target.

Stifel maintains at Hold, $90 price target.

Morgan Stanley maintains at Equal-Weight, $95 price target.

BofA maintains at Buy, $97 price target.

SBUX Price Action

Shares of Starbucks closed down 2.12% at $86.72.