Starbucks Earnings: Reinvention Plan Bears Fruit but Tough Macro Clouds Near-Term Prospects

Wide-moat Starbucks SBUX posted solid third-quarter earnings, with margin leverage leading management to reiterate its 15%-20% adjusted EPS growth target for fiscal 2023, which we view as achievable. The firm’s $9.17 billion in sales and $1.00 in adjusted EPS met and edged our $9.17 billion and $0.88 estimates, respectively, with robust (10%) global comparable-store sales growth underpinned by strength in beverage modifiers, a growing food attach rate, incremental delivery sales and a traffic recovery abroad. While we continue to view the firm as well-positioned to navigate the current environment, we struggle to see it achieve its 7%-9% three-year comparable-store sales targets as industry traffic remains pressured (down about 2% over the past three months, per Revenue Management Solutions). On balance, we expect minimal changes to our $104 intrinsic valuation, leaving shares trading in a range we’d consider fairly valued. We’re also changing our Morningstar Uncertainty Rating to Medium from High, consistent with our quantitative framework.

Despite our expected shortfall in the U.S. market, there are a handful of ways for the largest global coffee chain to achieve its medium-term investor day targets for 10%-12% sales growth and 15%-20% annual growth in diluted earnings per share, as CEO Laxman Narasimhan outlined on the firm’s earnings call. We agree—despite our forecasts for slowing comparable sales growth in North America, it seems plausible that the firm makes up the difference with strength in international unit growth. To this effect, we forecast 8%-8.5% annual net unit growth outside of China and 13%-13.5% annually in the firm’s second-largest market over the next five years, driving our expectation for a 10% top-line and 19% adjusted earnings per share cumulative adjusted growth rate over the next half-decade. The net effect is meaningful margin expansion over the decade to come, to 19.7% in 2032 from 16.1% (forecast) in 2023, by our estimates.