In late June, Starbucks (SBUX 0.80%) stock plunged to a multiyear low after the company warned shareholders that sales and earnings would fall short of its guidance in the third fiscal quarter and fiscal 2018 as a whole. While Starbucks executives claimed that the weakness was driven in large part by temporary factors, investors were skeptical of that explanation.
The third-quarter earnings report that Starbucks published in late July didn't do anything to quell investors' concerns. However, Starbucks bounced back in a big way last quarter. If anything, its momentum is likely to increase in the new 2019 fiscal year.
Q3 was horrendous
While Starbucks reported record revenue and earnings per share in the third quarter of fiscal 2018, its EPS growth was driven entirely by share buybacks and a lower tax rate. Operating income declined slightly as comparable sales growth slowed to 1%, both in the U.S. and on a global basis. Comp sales actually declined 2% in the previously fast-growing China market.
The comp sales slowdown in the U.S. and China had been flagged by Starbucks when it slashed its guidance in late June. Management explained that an April incident involving racial bias at one of its cafes upended its domestic marketing plans for the quarter. Meanwhile, a government crackdown on third-party delivery services hurt sales in China.
Trends moving in the right direction again
At the time of the guidance cut, management noted that U.S. comp sales growth had recovered to 3% in June. It also pointed to significant upside from new tools that would allow Starbucks to target customers who aren't members of its rewards program with personalized offers.
Fortunately, the recovery continued last quarter, as Starbucks saw a marked improvement in comp sales in its two largest markets. On Thursday, the coffee giant reported 4% comp sales growth in the U.S. and 1% comp sales growth in China for the fourth quarter, beating expectations. (On a global basis, comp sales rose 3%.)
The rebound in comp sales helped drive an 11% jump in revenue and a 13% increase in adjusted EPS to $0.62, ahead of the average analyst estimate of $0.60. For the full year, adjusted EPS reached $2.42, at the high end of Starbucks' updated guidance range.
To be fair, domestic comp sales growth is still below the levels Starbucks was seeing a few years ago. And in China, Starbucks is nowhere close to the high-single-digit comp sales growth rates that had been common up until a few quarters ago. However, the company isn't getting much benefit from its sales growth initiatives yet.
For example, Starbucks' crucial delivery partnership with Alibaba didn't begin until September -- and even then, it was launched only in Beijing and Shanghai. It expanded to another nine cities in late October and will be available in 30 cities across China by year-end.
Meanwhile, Starbucks hasn't yet implemented personalized offers for non-rewards customers in the U.S., but it will soon. Rolling out delivery throughout China and expanding personalization in the U.S. should boost comp sales growth over the next several quarters.
A good outlook, with plenty of upside
For fiscal 2019, Starbucks plans to add about 2,100 net new stores, representing unit growth of roughly 7%. It projects that revenue will rise 5% to 7% (including a 2-percentage-point headwind related to selling and licensing certain businesses) on a global comp sales increase in the lower part of its long-term target range of 3% to 5% growth. Adjusted EPS is expected to increase 8% to 10%, to between $2.61 and $2.66.
This is a solid forecast, but it may be overly conservative. Starbucks already posted 3% global comp sales growth last quarter. The combination of new digital personalization capabilities in the U.S., the rollout of Starbucks' mobile order and delivery program in China, and easy year-over-year comparisons could lead to full-year comp sales growth of 4% to 5%, boosting EPS past the company's guidance range.
Looking to fiscal 2020 and beyond, Starbucks' prospects are even brighter, as it will start to cash in on its new coffee alliance with Nestle in addition to enjoying a full year of the benefits of its current sales and earnings initiatives. Starbucks stock isn't cheap, after having jumped to a new 52-week high on Friday, but if the company's growth initiatives pay off as expected, it could keep moving higher.