Morningstar

Starbucks Off to Slow Start

Despite the soft U.S. results, we think the wide-moat firm remains a compelling capital-allocation story at its current price.

Securities In This Article
Starbucks Corp
(SBUX)

The natural question from a moat perspective is whether this implies any brand degradation or competitive issues. We're not convinced it does--peak-hour transactions remain healthy and last year's congestion issues appear to be in the past--and equate the current softness to innovation issues that periodically affect even wide-moat restaurant chains, as well as other store streamlining efforts. While we'll trim our 2018 consolidated comps to 3% and assume modest operating margin contraction (versus 19.2% last year) due to U.S. weakness and tax-reform-related employee and digital investments, we see full-year adjusted EPS of $2.48-$2.53 as realistic. We also view mid-single-digit comps, high-single-digit revenue growth, and operating margins in the low 20s as realistic long-term assumptions based on gradual U.S. improvement, a still-tremendous China growth opportunity, and meaningful channel development optionality.

Despite the soft U.S. results, we're planning a modest increase in our $66 fair value estimate due to a lower long-term tax rate. We still see shares as undervalued while also offering a compelling capital-allocation story.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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