Starbuck’s Earnings Preview: Tough Economic Headwinds Could Lead To Disappointing Results

Starbucks [[SBUX]] is scheduled to report their fiscal second quarter 2009 results after the market closes on Tuesday, April 29. Based on our analysis, we at EarningsPreviews.com are expecting SBUX to report disappointing results that fail to meet Wall Street’s consensus expectations.

 

Analyst Expectations

We are forecasting revenues of $2.36 billion and EPS of $.13. This would represent a 7% decline in revenues from last year’s $2.53 billion in the same period. The current analyst consensus estimates calls for revenues of $2.37 billion and $.15 EPS. Given the uncertainty in the global consumer retail environment, Starbucks chose not to provide revenue and earnings guidance.

 

Starbuck’s is making the right moves to try and preserve margins by cutting costs, but they continue to face tough economic headwinds. The company expects to save $500 million in 2009 primarily due to store closures and layoffs. However, traffic to Starbuck’s stores continues to decline. Our checks show that casual customers are choosing cheaper alternatives, such as McDonald’s [[MCD]] new McCafe offering. Even hardcore customers appear to be cutting back on their latte consumption, choosing to make less frequent visits.

 

While the company’s performance continues to struggle in the face of declining consumer spending, management appears to be making the right decisions in shifting their strategic focus. The overexpansion of the last few years is giving way to a greater focus on margins and expense structure. As the global economy begins to recover, we believe there will be ample growth opportunities for Starbucks (particularly in the international markets).

 

Share Performance

Since the beginning of the year, Starbuck’s shares are up almost 33%. However, in 2008 SBUX’s shares fell almost 54% as they underperformed the 34% decline in the Dow Jones index.

 

Valuation

Shares are now trading at 15x consensus 2010 EPS estimates. Despite the recent rally in Starbuck’s stock price, we feel that the company continues to face serious challenges in the coming quarters. We would recommend investors remain on the sidelines unless the price drops below $10 again.

 

Recommendation: Hold with a $10 price target.

 

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