Starbucks is falling after global comparable store sales rose 2.0% during the quarter to fall short of the +3.0% consensus estimate. Transactions were flat during the quarter, while pricing added two percentage points of growth. We predicted lower comparable sales due to immense cannabalization of its own stores.

Global comparable sales by region: Americas +2%, China/Asia-Pacific, +1%, EMEA-1%.

Active membership in Starbucks Rewards in the U.S. increased 11% to 14.2M during the quarter. Starbucks Rewards member spend represents 37% of U.S. company-operated sales, and Mobile Order and Pay represents 11% of U.S. company-operated transactions.

The company’s consolidated operating margin fell 80 bps to 19.2%. Operating margin in the Americas segment was down 100 bps to 23.0%.

Starbucks expects FY18 EPS of $2.48 to $2.52 vs. $2.48 consensus and $2.30-$2.38 prior guidance. Global comparable sales growth is expected to fall on the low end of the 3% to 5% guidance range previously issued.

Forward projections

We have seen where the stock has been, now let us discuss our thoughts as we look to 2018. There is a lot of good news for shareholders. First, the weight of the flagging business lines will no longer drive up expenses for minimal revenues. This is a plus. Second, the company has boosted its dividend another 20% and announced an expanded buyback. While the buybacks are the main reason earnings per share are rising, they do boost shareholder value. Performance wise we think 2018 will see a return to growth.

We believe earnings per share expectations are too high. We think on an adjusted basis will rise 13-16%, or $2.31 to $2.40 per share. We are simply a little more bearish on the sales This is because we see the strategic actions of selling off business lines and refocusing efforts in the growing Asian markets as having a strong benefit. We further believe that comparable sales may return to a positive trend, and are eyeing 3.5% to 4.5% growth, with much of this being driving in the Asian markets. For the Americas, we see 1-2% comparable growth, most of this driven by pricing. While overall traffic is expected to grow, this will be due to a higher store count. We still strongly believe that the saturation issue is real, but it is primarily a North American issue. As for overall sales, we see them driving earnings higher when combined with controlled operational expenses, and are targeting revenues to approximate $25.5-$26.5 billion.

Our take on the stock

When we piece it all together, a hold makes sense here. There are a lot of questions regarding the future, but we think 2018 will see a better year growth wise than the last two years. We think Starbucks will deliver as it is a quality company. The stock didn’t move much on earnings, but could see some positive momentum following the plans to streamline the business. As for us, we just want a fair price, and the current multiple is a touch rich for our blood. We want to own the stock at $55, or even preferably at $50 if gets there. Until then, we are watching, even if it cant get there

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