Starbucks (NASDAQ:SBUX) is gaining momentum as folks, especially in the U.S., are getting vaccinated against the coronavirus. The international coffee chain reported second-quarter results on Tuesday, April 27, and the results were so good that it’s raising expectations for the rest of 2021.
Central to its rebound is the extent to which governments slow the spread of the coronavirus. Progress on this front is going well in the U.S., where infections and deaths are trending downward, and not so well in other parts of the world like India and Brazil. Fortunately, the vaccines developed against the coronavirus appear to be very effective. Additionally, the supply of vaccines is ramping up, boosting confidence that more countries will turn the tide against the pandemic.
That can partly explain management’s optimism for the rest of 2021.
Mobile orders are surging
In the second quarter, comparable-store sales in the U.S., which exclude the effect of new store openings and closings, increased by 9% from the same time last year. That was near the higher end of the 5% to 10% growth that management was expecting.
Digital orders are what’s fueling these sales. Starbucks launched Stars for Everyone six months ago. The free-to-join program, which allows Starbucks Rewards members to earn rewards on their purchases without preloading their accounts, is hugely popular, helping active Starbucks Rewards membership grow 19% since its launch to reach a record 22.9 million. It also gives members access to convenience benefits like customizing a drink in the Starbucks app and saving your favorite drink so that it’s quicker to order. Overall, Starbucks Rewards members were responsible for 52% of sales in the U.S.
Furthermore, mobile orders totaled just over a quarter of all sales in the U.S. That’s up from 18% a year ago. Importantly, growth in mobile ordering could increase profitability by reducing the time a customer spends with a Starbucks employee while deciding on their order. That staff member can instead spend their time making a drink. It can also improve customer satisfaction by removing the waiting in line to make an order. Avoiding lines is especially important while COVID-19 is still around.
Raising the bar
The positive momentum from second-quarter results gave management confidence to raise guidance for the rest of 2021. The company was previously expecting revenue for 2021 to come in the range of $28 billion to $29 billion. Now, it’s raising those expectations to a range between $28.5 billion and $29.3 billion.
Impressively, the additional revenue will not be at the expense of profit margins, which Starbucks also expects to be better for 2021. The previously expected range for an operating profit margin for 2021 was between 14% and 15%. That’s been upgraded by 100 basis points to between 15% and 16%.
And with revenue and profit projections improving, it follows that earnings per share (EPS) will be better than expected. The previously given range for EPS in 2021 was between $2.42 to $2.62. That’s been upgraded to a range of $2.65 to $2.75.
Regarding the improved outlook for 2021, here’s what CFO Rachel Ruggeri had to say in the second-quarter conference call:
And therefore we are raising our full year fiscal ’21 EPS guidance as well as updating a few other metrics. The increase was predominantly driven by better than expected operating results in the first half of the year and anticipated benefit attributable to certain discrete tax items in Q4 and a slight tailwind from foreign currency translation, barring of course any new, significant and sustained waves of COVID-19 infections and any major economic disruption.
Still, investors were unimpressed, sending shares of the coffee chain down by 3% following the report. That can partly be attributed to the slow store development. Starbucks opened a net of five new locations in the second quarter while it’s guiding investors for 1,100 net store openings in 2021. Nevertheless, that could be a buying opportunity for those looking for a large-cap company poised to rebound as the world bounces back from the pandemic.
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