King Dollar Still A Factor: Starbucks Earnings

| About: Starbucks Corporation (SBUX)

Summary

We previewed SBUX earnings by examining the role of a weakening dollar compared to 2015.

Given SBUX international exposure, we were hoping for insight on how the dollar's trending lower could impact earnings.

It appears results were only mildly affected, but guidance from management is promising.

Starbucks (NASDAQ:SBUX) results are in, and the market met them with a collective yawn. I will leave it to others to comb through the earnings results and offer their opinions; instead, continuing in our multi-part series on the impact of currency exchange headwinds on earnings results, we would like to parse the call and see what we find.

Foreign Exchange Headwinds

When international companies do business overseas, a strong US dollar affects business in various ways. When Starbucks is paid in foreign currencies abroad, it converts the foreign revenues back to the US dollars, meaning profits are worth less when the dollar is stronger against the currency. Also, Starbucks products are more expensive to foreign buyers - this in turn could lead to weaker sales as well.

On questions of profitability and earnings, then, Starbucks has been impacted since 2015 when the dollar became increasingly strong. As we will see below. Investors, anticipating the currency effect on a company's earnings, can adjust their strategy accordingly. In fact, already this earnings season we have seen companies like DuPont and 3M (NYSE:MMM) report on the impact of currency exchange.

In our preview article, we noted that last quarter, Q1, saw foreign currency headwinds shaving 2 points off revenue growth. Indeed, in Q12015, a year ago, FX also trimmed two points off revenue. So what did we see last week for Q2?

Impact on Results

First, on the results generally, we see a lessening impact on revenue due to the mitigating trajectory of the dollar throughout the quarter. Scott Maw, CFO, put it this way:

"And our reported record Q2 results became even more noteworthy in light of the fact that foreign currency translation shaved a full point off revenue and two points off operating income growth in the quarter."

In fact, the headwinds "only" shaved off 1 point this time, basically a decrease of 50% from last quarter's exchange impact. We believe this drop-off is in fact a positive sign, and one that did not get much credit in the market.

In the China/Asian Pacific region, we a 90 basis point reduction of margins:

"Excluding the 90 basis point impact of foreign exchange, CAP margins expanded by 110 basis points in the quarter."

Turning to EMEA region, we see some troubling news that overshadowed the weakening impact of foreign exchange. The 1% comparable sales increase was pretty much unimpressive, notwithstanding it signaled the 12th consecutive quarter of positive comp growth in the region. As you might have guessed, though, the dollar was very much a factor. Here's Kevin Johnson, COO:

"[the adjustment for] continued mix shift from company-owned to licensed and foreign exchange headwinds, which together impacted revenue growth by 11 points, EMEA on an adjusted revenue basis would deliver growth of 7%..."

So we see the impact quite noticeably in this region, albeit tied in with the shift to licensed stores. It is not a stretch to believe that the adjusted revenue basis would have been roundly applauded at the 7% clip, but because of these factors, it was something of a footnote.

Guidance

Finally, let's turn to guidance. Last quarter, SBUX guided for a negative impact on revenue growth of 2 points and non-GAP EPS of 3 points. In this latest quarter, we see some interesting changes. Here's Scott Maw again:

"For the full year, foreign exchange is now expected to negatively impact revenue growth by one point to two points and operating income growth by two points to three points." What we are seeing is management lowering that expected impact by putting a lower range on each (instead of 2 points, it is now 1-2 points, etc."

Conclusion

We strongly believe this is a positive piece of news given the earnings climate the market is experiencing. If indeed the impact can continuing trending lower to zero, Starbucks can shake off these headwinds and get back to reporting results that don't have to be qualified with "adjusted for FX…" Investors in turn will be given a clearer picture of revenue and earnings, without this currency qualification hanging over every report.

We hope to examine other multi-national companies and see whether others are experiencing a lessening impact on earnings and revenue.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.