Starbucks Makes Good on Its Comps Promise

There was no shortage of doubts about Starbucks (SBUX +0.02%) going into its fiscal fourth-quarter and full-year financial report. After several quarters of disappointments, investors weren't sure the company could make good on its plan to deliver an increase in comparable-store sales. Shareholders let out a collective cheer when Starbucks reported comps that were actually better than expected.

For the fourth quarter, Starbucks reported record net revenue -- for the second time in as many quarters -- of $6.3 billion, up 11% year over year and edging out analysts' consensus estimates of $6.28 billion. Adjusting for unfavorable foreign currency translation and the company's ongoing reorganization, net revenue grew 9% year over year. Adjusted earnings per share of $0.62 expanded 13% year over year, also ahead of expectations of $0.60.

Image source: Starbucks.

A comps surprise

Data source: Starbucks Fourth-Quarter Financial Release. YOY = year over year.

The biggest revelation of the quarter was that global comparable-store sales appeared to be back on track, up 3% year over year, after ticking up just 1% last quarter. Starbucks said the improvement was driven by a 4% increase in the average ticket, with 4% comps growth in the Americas and U.S. segment. Starbucks has been pinning much of its recovery on a massive build-out in China, so it was important to learn that comps in the Middle Kingdom were also better, up 1% year over year, a significant improvement over the 2% decline in the third quarter.

There were other signs of improvement. Members of the Starbucks Rewards loyalty program grew to 15.3 million active members in the U.S., up 15% year over year, while Mobile Order and Pay expanded to represent 14% of transactions at company-operated stores in the U.S. Starbucks opened 604 net new stores during the fourth quarter, bringing its year-end total to 29,324 stores across 78 markets.

The company also made progress on its capital return program, having pledged to return $25 billion to shareholders via share buybacks and dividends through fiscal year 2020. Starbucks reported that it returned $3.6 billion during the quarter, and for fiscal 2018, total shareholder returns climbed to $8.9 billion.

"Starbucks record Q4 performance reflected meaningful improvement in virtually every critical operating metric compared to Q3," said CEO Kevin Johnson. "As we enter fiscal 2019, we are executing against a clear growth agenda, with a focus on our long-term growth markets of the U.S. and China."

What the future holds

For the 2019 fiscal year (which began on Oct. 1), Starbucks expects to achieve global comparable-store sales expansion near the low end of its 3% to 5% targets. The company is forecasting revenue growth in a range of 5% to 7% year over year, including a 2% net negative impact from its continuing reorganization. Starbucks anticipates earnings per share in a range of $2.32 to $2.37, and adjusted earnings per share of between $2.61 and $2.66.

To break that down into quarterly sized bites -- and while I don't put much stock in Wall Street's short-term mindset -- analysts' consensus estimates are calling for revenue of $6.5 billion for the fiscal first quarter, which would hit the high end of management's growth estimates, and adjusted earnings per share of $0.66. 

Considering how comps declined for several successive quarters, the return to comparable-store sales improvement was a welcome surprise for investors, and they celebrated by bidding up the shares more than 9% in the trading session following the earnings release. While challenges remain, this is a good first step toward reassuring shareholders that there's more growth in store for Starbucks.