Starbucks Earnings Crushed Expectations. Why Its Stock Is Dropping.

Starbucks stock was dropping despite reporting better-than-expected earnings following Tuesday’s close.

Starbucks reported non-GAAP per-share earnings of $1.01 on $7.5 billion in revenue, a record. Analysts had forecast earnings per share of $0.77 on $7.3 billion in revenue.

Despite beating consensus revenue and earnings targets, Starbucks stock is down 3%, to $122.30.

Driven by an 84% increase in same-store sales in America, the global coffee giant reported an overall increase in comparable-store sales of 73% relative to the third quarter last year. Indeed, brand loyalty remains strong, especially in the U.S. where 90-day active members of the Starbucks Rewards loyalty program increased 48% year-over-year and now account for 51% of all spending in U.S. stores–up 8% from pre-pandemic levels.

In a statement, Starbucks CEO Kevin Johnson told investors “Starbucks delivered record performance in the third quarter, demonstrating powerful momentum beyond recovery. Our ability to move with speed and agility and to be out in front of shifting customer behaviors has helped further differentiate Starbucks, positioning us well for this moment.”

The strong results have prompted management to raise the company’s 2021 earnings per share outlook from $2.90-$3.00 to $3.20-$3.25.

During the earnings call, analysts were keen to hear about management’s outlook on China, as they expressed concerns about consumer pushback against U.S. brands in the region. However, Johnson was quick to dispel the concerns, commenting that there hasn’t been a geopolitical event in China that has impacted them in the past couple of years, and he doesn’t foresee that happening as long as they continue taking care of their partners and customers.

While fears about rising labor costs did not materialize since operating margins were higher than last quarter and the corresponding period last year, analysts were expecting better performance in international markets. Cowen analyst, Andrew Charles, stated that Starbucks’s 41% change in comparable-store sales relative to the same period last year fell short of the 62% growth he anticipated to see. Nonetheless, the impressive numbers from the U.S. were enough for Charles to raise his price target from $126 to $135. Likewise, Stifel analyst Chris O’Cull had expected international comparable store sales to increase 66%. O’Cull further noted that management offered guidance, which implied roughly flat two-year international comparable store sales.

The question to investors remains whether strong U.S. growth is enough to keep on offsetting slower international growth and push the stock higher.