Global coffee powerhouse Starbucks (NASDAQ: SBUX) announced fiscal 2020 first quarter results that BEAT expectations.

Revenue came in at $7.1 billion, roughly in-line with the consensus estimate of $7.11 billion. The performance marked a 7% increase over the same period a year ago when revenues were $6.63 billion.

Non-GAAP Earnings per share of $0.79 beat the consensus estimate of $0.76 by 4%.

The results show that Starbucks is showing no signs of slowing down after a successful 2019. The holiday season has given it a solid jump to the new year.

Comparable store sales grew 5% globally. This was driven by 6% comp growth in the U.S. as Starbucks Rewards membership jumped 16% to nearly 19 million active customers. International comp growth was a more modest 1% during the quarter as strength in China wasn’t matched in other overseas markets.

 

Coronavirus May Weigh on 2020 Results

The first quarter results are likely to be overshadowed by investor concerns surrounding the coronavirus and the potential impact on Starbucks. The stock had been under pressure in the days leading up to the earnings report due to the closure of several stores in China.

The Asia-Pacific region is a key growth market for the Starbucks. Although it has faced competitive pressures from the increasingly popular Luckin Coffee (NASDAQ: LK) outlets, comparable-store sales growth has been as robust as the chain’s coffee beans in recent quarters.

As part of the first quarter report management warned that second quarter and full-year results are likely to be negatively impacted by the Wuhan coronavirus epidemic.

Management chose to maintain its 2020 outlook until it can get a better read on the potential effects of the viral outbreak. For now it is expecting revenue growth of 6% to 8% and comparable-store sales growth of 3% to 4%.

It is likely that we will see an update to this guidance in the weeks ahead as the situation in China and other parts of the world unfold.

Starbucks has closed all of its stores in the province of Hubei, the centre of the outbreak. Although this represents a small portion of its overall Chinese footprint, the impact may be meaningful and further closures may ensue.

 

Stock Price Outpacing Earnings on Growth Hopes

Starbucks’ latest results were encouraging despite the looming coronavirus uncertainty. Customer traffic at its 31,795 retail locations is trending in the right direction owing to its new product introductions and digital marketing campaigns. It expects to add another 2,000 cafes around the world this year.

The fast-casual restaurant industry has produced earnings growth of around 6% over the last five years while Starbucks has significantly outperformed with 16% growth. Although profit growth is forecast to slow this year to around 8%, it is expected to be more than twice that of the industry.

The stock’s 3.2% earnings yield, the inverse of its price-to-earnings (PE) ratio, remains well off its mid-2018 peak of 4.8%. While it is double the yield on the 10-year Treasury bond, this suggests the stock is overvalued relative to the earnings it has generated. By comparison, the current earnings yield on the S&P 500 is 4.1%.

After soaring 37% last year, Starbucks stock is up 1% so far this year which is on par with its industry average. This compares to a flat year-to-date return in the S&P 500 index.

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