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Starbucks Has a Lot to Prove on Thursday

By Rick Munarriz – Apr 26, 2017 at 12:10PM

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The leading premium java chain steps up for an important quarterly earnings report this week.

The Unicorn Frappuccino may have come and gone at your local Starbucks (SBUX 0.24%) last week, but it's not the only sweet-and-sour concoction brewing at the premium coffeehouse chain these days. Starbucks will be reporting quarterly results after the market close on Thursday, and there are reasons to believe that it will have its share of sugary yet ultimately tart moments. 

Growth is slowing at Starbucks. Revenue increased 6.7% in its most recent quarter, its weakest year-over-year gain since 2009. Analysts see slight acceleration for the fiscal second quarter that it will be discussing tomorrow afternoon, but at least one Wall Street pro isn't convinced that the news will be worth a second cup. 

OTR Global downgraded the stock on Tuesday, taking its rating from "Positive" to "Mixed." The firm's Starbucks manager checks indicate that competition and cannibalization are leading to a slowdown of the sales growth in key U.S. and Chinese markets. The timing of the downgrade is lousy for those long the stock. An analyst downgrade just two days before an earnings report is not a coincidence. It may not prove to be the correct call, but it's a gutsy show of conviction.

Starbucks on Royal Caribbean's Allure of the Seas cruise ship.

Image source: Starbucks.  

Starbucks was already coming off of a challenging holiday quarter. The 3% uptick in U.S. same-store sales during its fiscal first quarter was its softest showing in years. Customers were paying more, with the average check up 5% since the prior year's holiday quarter, but that only means that the average store rang up 2% fewer transactions. 

Comps growth is an important component as expansion slows at Starbucks. Analysts see revenue growing 8.4% to $5.41 billion, improvement -- sure -- but it would be the chain's third-weakest period of growth over the past five years.

Those same analysts also see a profit of $0.45 a share, up from the $0.39 a share it posted a year earlier. There was a time when Starbucks would beat Wall Street profit targets with ease, but that hasn't been the norm lately. Analysts have nailed the bottom-line number in three of the past four quarters, and the other period they were off by just a penny. 

This should be a good time for Starbucks. The economy's humming along, busy with active commuters willing to spend a chunk of change of a premium morning brew. However, the proliferation of cheaper java at drive-thru outlets, the convenience of home-brewed solutions, and perhaps even market saturation may be weighing on the baron of baristas. Starbucks even blamed some of the store traffic slowdown last quarter on customer service issues related to the growing popularity of its mobile ordering platform resulting in congestion at the handoff counter. 

Starbucks may still be the king when it comes to premium beverages, but there are a lot of questions and concerns heading into Thursday afternoon's telltale report.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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