Starbucks Q4 FY 2016 Earnings Preview: Focus On China To Continue; Reverting Comps To Historical Levels A Priority

Key Trends:

• Although the June quarter saw comps coming down to 4%, it continued to be impressive, amid the backdrop of a weak restaurant industry struggling with falling sales and traffic, due to the decline in food at home inflation, and changing preferences towards healthier food options. Further, the company described the fall as an anomaly, attributable to the change in its loyalty program. In the upcoming quarterly results, we expect comps to bounce back to over 5%, as has been the case at Starbucks historically.

• Challenging consumer, economic, and geopolitical environment across EMEA may continue to be a drag on the company’s performance in the region.

• A higher coffee price may erode Starbucks hefty profit margins. The effect of rising coffee prices was recently seen on its share price. However, the effect will be more visible in the long term.

• Targeted opening of 5,000 stores in China before 2021, and the first international roastery in Shangai. This demonstrates the company’s confidence in its growing Chinese business, given the forecast rise of 38% in China’s GDP per capita by 2020. Further, the sales of consumer discretionary items such as coffee are forecast to increase by 7% per annum in the same period. It also announced the opening of a Starbucks Reserve Roastery in Japan during 2018.

• By addressing, through its brand Teavana, the $9.5 billion Chinese tea market, which is over ten times the size of the Chinese coffee market, the company strives to increase its tea sales to $3 billion over the next five years.

• Product innovation in the form of pumpkin spice latte, one of the seasonal favorites at Starbucks, resulted in more than 150,000 incremental visits on the first two days of the launch, as stated by Sense360.

• Adapting not only to changing consumer tastes and preferences in the U.S., but also according to geography. Its flexibility is a part of the reason that allowed it to succeed in the tough and primarily tea-drinking market of China.

• Expanding its footprint, while changing its store mix. The focus is on opening up more drive-thrus in the outer edges of urban and suburban areas, and express stores which function as walk-thrus in New York, Boston, and Seattle, as opposed to dine-in restaurants.

• Being the leader in K-Cups, its partnerships with companies like Pepsi in Latin America, Tingyi in China, and Anheuser-Busch, will help make further inroads in the ready-to drink segment, which is forecast to grow at approximately 10% y-o-y in the next five years.

Have more questions on Starbucks? See the links below.

• Why Is China The Center-Piece Of Starbucks’ Growth Story?
• Why Has Starbucks’ Stock Price Stagnated In The Year So Far?
• What Is Starbucks’ Growth Strategy?
• K-Cups, Expansion In China Drive Growth For Starbucks In The June Quarter
• Starbucks Q3 FY 2016 Earnings Preview: Continued Focus On China, Expansion Of The Single-Serve Segment To Drive Results
• Starbucks’ Expansion Plans in China & Digital Channels Drive Growth In Q2 FY 2016
• How Has Starbucks’ Revenue And EBITDA Composition Changed Over 2011-2015?
• By What Percentage Have Starbucks’ Revenues And EBITDA Grown Over The Last Five Years?
• What Is Starbucks’ Revenue & EBITDA Breakdown?
• What’s Starbucks’ Fundamental Value Based On Expected 2016 Results? (Updated After Q2 FY’16)
• Starbucks Q2 FY 2016 Earnings Preview: New Developments In China/Asia Pacific Region To Steal The Limelight
• Where Will Starbucks’ Revenue And EBITDA Growth Come From Over The Next Three Years? (Updated After Q2 FY’16)

Notes:

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