Starbucks: Should You Buy In Before Second-Quarter Results Are Out?

Starbucks  (NASDAQ: SBUX  ) , the largest chain of coffeehouses in the world, has watched its stock widely underperform the overall market in 2014. One strong earnings report could get it back on track, however, and second-quarter results are due out in a couple of days. Let's review the company's first-quarter report, look at the analyst expectations for the upcoming release, and see what competitors Krispy Kreme Doughtnuts (NYSE: KKD  ) and Dunkin' Brands (NASDAQ: DNKN  ) are up to, in order to determine if we should be buying a position right now.

Source: Starbucks' Pinterest

The last time out
On Jan. 23, Starbucks released its first-quarter report for fiscal 2014. The results were mixed compared to expectations, but equated to the best first-quarter in the company's history. Here's a breakdown and year-over-year comparison:

Metric Reported Expected
Earnings Per Share $0.71 $0.69
Revenue $4.24 billion $4.29 billion

Source: Benzinga

Source: Starbucks' Facebook

Earnings per share increased 24.6% and revenue increased 11.8% year-over-year, driven by global comparable-store sales growing an impressive 5%. Starbucks' operating income rose 29% to $813.5 million and its operating margin showed great strength, expanding 260 basis points to 19.2%. The company generated ample free cash flow during the quarter, allowing it to repurchase approximately 600,000 shares of its common stock and maintain its quarterly dividend of $0.26. 

Expansion was a bright spot for Starbucks as well, as the company opened 417 locations during the quarter. In doing so, it surpassed three milestones: 4,000 locations in China and the Asian Pacific, 2,000 locations in Europe, the Middle East, and Africa, and 20,000 total locations worldwide. At the conclusion of the quarter, Starbucks' store count stood at 20,184 and this kept it on pace for its goal of opening 1,500 locations in fiscal 2014. Overall, it was a great quarter for Starbucks and put it on pace for yet another record-setting fiscal year.

Expectations & what to watch for
Second-quarter results are due out after the market closes on April 24, and the current estimates call for double-digit growth. Here's an overview:

Metric Expected Year Ago
Earnings Per Share $0.56 $0.48
Revenue $3.97 billion $3.56 billion

Source: Estimize

Source: Starbucks' Pinterest

These expectations call for earnings per share to increase 16.7% and revenue to rise 11.5% compared to the same period a year ago. Key metrics aside, there are three other important statistics and updates to watch for:

  • First and foremost, it will be crucial for Starbucks to provide earnings outlook on the third quarter that satisfies analyst expectations. In the first-quarter report, Starbucks said it expects third-quarter earnings per share to be in the range of $0.64-$0.66, while the current consensus analyst estimate calls for $0.66. If Starbucks were to maintain its outlook it would be fine, but I would prefer the outlook to be raised or at least have management note that it expects earnings to come in at the high-end of the expected range.
  • Secondly, while providing earnings per share guidance for the second quarter, it will also be important for Starbucks to reaffirm its full-year outlook on fiscal 2014. This outlook forecasts earnings per share in the range of $2.59-$2.67, revenue growth of 10% or more, comparable-store sales growth in the mid-single digits, and operating margin expansion of 150-200 basis points. 
  • Lastly, watch for the number of new stores opened during the quarter and make sure the company is still on track to achieve its expansion projections for the year. Starbucks had said it expects to open 1,500 locations in fiscal 2014; it went on to open 417 in the first-quarter, so it appears to be on pace to meet its goal. It is definitely worth watching, though, since expansion is such a huge part of the company's long-term growth plan. 
I believe Starbucks will attain second-quarter earnings estimates and satisfy all three of these elements in the process. For these reasons, I believe Starbucks is a great investment opportunity right now.

A positive indicator for Starbucks
Krispy Kreme Doughtnuts, the global chain of doughnut and coffee shops, released its fourth-quarter report for fiscal 2014 just a few weeks back on March 12. This release was for the 13-week period ended on Feb. 2, which will give us a sense on the condition of the consumer during the time frame that included five weeks of Starbucks' second quarter. Here's a breakdown of what the company accomplished:

Metric Reported Expected
Earnings Per Share $0.12 $0.13
Revenue $112.75 million $119.59 million

Source: Benzinga

Source: Krispy Kreme's Facebook

Krispy Kreme's earnings per share increased 33.3% and revenue increased 3.3% year-over-year, as comparable-store sales rose 1.6% at company-owned locations. Although the results missed expectations, it still made for a strong quarter; this allowed the company to raise its outlook on fiscal 2015. It now expects earnings per share in the range of $0.73-$0.79, versus previous estimates of $0.71-$0.76. 

This report is a positive indicator for Starbucks because it shows that customer traffic continued to increase at quick-serve restaurants in January. It also provided a positive outlook on the next four quarters, which leads me to believe that Starbucks will be able to maintain or raise its outlook on the second quarter and full year. The information provided in Krispy Kreme's earnings report supports the idea of picking up a position in Starbucks today.

Competitor due out shortly after
Dunkin' Brands, the company behind the very popular Dunkin' Donuts and Baskin-Robbins brands, will be reporting its first-quarter earnings for fiscal 2014 a few weeks after Starbucks' second-quarter results are out. Here's what analysts currently expect the report will hold:

Metric Expected Year Ago
Earnings Per Share $0.36 $0.29
Revenue $172.94 million $161.86 million

Source: Estimize

Source: Dunkin' Donuts' Twitter

These expectations would result in earnings per share increasing 24.1% and revenue increasing 6.8% year-over-year. If these projections were to become reality, it would put the company on track to achieve its full-year expectations of $1.79-$1.83 in earnings per share and revenue growth of 6%-8%. Starbucks' report will be a great indicator for Dunkin', like Krispy Kreme was for it, so watch closely if you are a current or potential Dunkin' investor. With this being said, Dunkin' Brands is a great investment opportunity in itself if you are not sold on Starbucks.

The Foolish bottom line
Starbucks is one of the dominant players in the growing coffee and quick-serve restaurant industry, and analysts' second-quarter earnings estimates seem well within reach. The company's stock is in the red year-to-date, underperforming the overall market by a wide margin, and I believe this makes for an incredible buying opportunity. Foolish investors should strongly consider making a long-term investment in Starbucks right now as I believe it has the potential to outperform the market for the rest of 2014 and for many years to come. 

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