Shares of Starbucks (SBUX) have been on a downward slope since late 2015. Can Starbucks ever get back its premium valuation?
In the past I have been bullish on shares of Starbucks. I thought Starbucks' success hadn't been reflected in its share price, but it seems investors really don't want to give the stock a premium valuation.
Last Thursday, Starbucks reported fourth-quarter fiscal 2016 results. The company said it earned 56 cents per share, one cent better than the consensus estimate. Revenue rose 16.2% to $5.71 billion, vs. the $5.69 billion estimate.
Jim Cramer, TheStreet's founder and manager of the Action Alerts PLUS portfolio, wrote to Action Alerts PLUS subscribers on Friday that Starbucks had "much-better-than-feared results." Still, Cramer and Research Director Jack Mohr downgraded the stock's rating, even though they like the company. They said that "the trend of 'staying at home' has clearly trickled down and hit even the best of the bunch, Starbucks."
U.S. comparable-store sales rose 4%, comprised of a 6% increase in the average ticket and a 1% decrease in traffic.
Management cut guidance for fiscal 2017. The company said it sees earnings between $2.12 and $2.14 and revenue growth in the double digits. Revenue guidance was slightly higher than the consensus estimate of 8% revenue growth. Management is planning to add approximately 2,100 net new stores globally. Over 70% of its new stores will be located outside the U.S., especially in China, Russia and India. It wants to double the number of stores in China from the current 2,400 to over 5,000 by 2021.
I think most investors were surprised the company gave guidance for fiscal 2017 of 10% revenue growth, since it was assumed comparisons with 2016 would be a bit more difficult because last year contained 53 weeks.
Starbucks will hold an analyst meeting in New York on Dec. 7.
Starbucks has been executing pretty well, but apparently not well enough to slap a premium valuation on the stock. I think investors are concerned about the lackluster store traffic. Management keeps jamming through higher prices (which keep same-store sales high), but store traffic keeps declining.
For example, last year global same-store sales were up 6.9% and the Americas were up 7%. This year, global same-store sales were 5.4% and 6.3% for the Americas. China and Asia Pacific were up 9.3% in 2015 and ended 2016 at 3%. Europe was 3.5% and ended 2016 at 0%. That's not an especially encouraging performance, especially when the company plans to drive sales by expanding overseas.
To get Starbucks higher, the company has to straighten out its same-store sales problem overseas and drive higher traffic in the U.S.
Analysts seem to think the stock can get a mid-30 multiple (34 to 36), but it's clear investors really don't want to pay up for Starbucks. If you assume Starbucks will earn around $2.13 per share for fiscal 2017, and use a 26 multiple -- which still gives the company a growth valuation -- the stock is probably worth $55.
It's just not worth the risk for a couple of bucks of upside. I think the old days of paying 35 times estimates for Starbucks are over. This stock has been decaffeinated.