Starbucks sales are expected to hit a record high thanks to inflation

Starbucks Corp. is expected to report record quarterly sales, buoyed by higher prices, although profits are expected to fall amid labor tensions, rising ingredient costs and the COVID-19 shutdown in China, as the coffee chain has tried to expand.

Starbucks SBUX,
-2.89%
It’s due to report its fiscal fourth-quarter earnings Thursday, and Wall Street will be looking for signs of continued demand in an economy where your coffee economy is growing. Rampant inflation has raised concerns about whether customers have room to spend on cold drinks, pumpkin spice lattes and oat milk macchiatos.

However, during Investor Day last month, Starbucks executives portrayed the company as a company that learned from the “arrogance” that characterized its culture during the Great Recession, and said 2008 was nothing like 2022.

“So far, we’ve been immune,” interim CEO Howard Schultz said at the event.

Starbucks executives said, during the company’s latest earnings call in August, that they have raised prices about 5% over the past 12 months. A recent study on MagnifyMoney.com found that Starbucks imposes an 18.3% ‘tax’ on its famous Pumpkin Spice Lattemaking the price of one dollar higher than a standard 16 ounce latte.

Opinion: Why is inflation likely to remain high no matter which party wins the midterms

But BofA analysts said Starbucks customers can handle the higher prices. In a note on Wednesday, they said Starbucks was among the top picks for the holiday season, arguing that its “high-income customer base is more insulated from the overall stress.” And they are not alone.

“Business in the United States is booming, and Chinese risks are increasingly understood,” Wedbush analyst Nick Setien wrote in a research note on Friday. “Meanwhile, international business, for example. China continues to do well. This bodes well not only for FQ4 results, but also for FY23 guidance.”

But analysts have reservations about the company’s goals beyond that. Some suggested Starbucks’ long-term financial goals set at the time – including 7% to 9% annual same-store sales growth in the next two fiscal years – He might be a bit optimistic.

In the near term, the company raised wages amid the emerging unions’ crackdown. But the union representing those workers said some efforts to bargain with the coffee chain failed within minutes, after company representatives pulled out of meetings over objections with some members likely participating remotely. Starbucks, in turn, claimed that broadcasting or recording those meetings amounted to a “failure to bargain in good faith,” and both sides said they agreed to meet in person.

For more: Starbucks urged to work with unions in message from members of Congress

what are you expecting

gains: Wall Street analysts expect Starbucks to report adjusted earnings of 72 cents a share, compared to $1 a share in the same quarter last year, according to FactSet. Estise, which compiles estimates from analysts, hedge fund managers, executives and others, reports a consensus estimate of a loss of 75 cents a share.

he won: Analysts expect sales of $8.32 billion, a record quarterly increase from $8.15 billion in the quarter last year, according to FactSet. It is estimated that same-store sales will increase by 4.2%. Estise reports a consensus sales estimate of $8.37 billion.

Share price: Starbucks stock is down 25.8% this year. By comparison, the S&P 500 SPX Index,
-2.50%
It decreased by 19.1%.

What the analysts say

During Investor Day, executives said that cold drinks such as Nitro Cold Brews and ice shakes “demand a high price.” Analysts expect these items to help sales in the fourth quarter for Starbucks.

“We expect domestic businesses to be driven by modest growth in traffic combined with prices, higher food attachments, and strong sales of higher-ticket cold beverages,” William Blair analysts said in a research note this month.

But they said they expected operating margin to shrink in the North American Starbucks segment, due to “inflationary pressure and investments in business/operations initiatives partially offset by pricing (including additional increases taken during the summer to offset additional wage increases) and sales leverage.”

Oh my lot! People pay 14.1% more on average for pumpkin spice products.

Starbucks in May withdrew its forecast for the rest of the fiscal year, citing rising costs and saying the direction of China’s policies on the novel coronavirus was increasingly difficult to measure. During the call on Thursday, there could be more questions about whether inflation has slashed demand – even for customers who are not yet upset.

Analysts B. of A. said in a separate note earlier this month that credit and debit card data showed overall restaurant demand “consistently declined” from March to July. But then it rebounded in August and lasted until September.

“Industry firms in general have proven to be more resilient than expected, leaving investors to focus intently on any signs that overall weakness is translating into significantly slower firms, or broader weakness in demand (for example, higher income groups that have been more insular). yet) they said.

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