K-Cups, Expansion In China Drive Growth For Starbucks In The June Quarter

by Trefis Team
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Starbucks Corporation (NASDAQ:SBUX) reported its June quarter results on July 21, 2016, meeting the consensus estimate for EPS, but missing it slightly for revenues. That said, Starbucks saw a significant 7% y-o-y growth in its top-line, undeterred by the industry-wide traffic deceleration and macroeconomic changes that other players in the industry have been suffering from. At 9.7% y-o-y, the channel development segment was one of the biggest contributors to the revenue growth, supported by the growing dollar share of Starbucks Roast and Ground, and Starbucks K-Cup platforms.

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Highlights Of The Quarter:

1. Slowdown In The Comps Growth In The Americas

Historically, Starbucks’ levels of comparable store sales growth have been at or above 5%. In a shocking move for the investors, the June quarter saw this metric coming down to 4%, impressive when compared to other players in the quick service restaurant marketplace, but very far from Starbucks’ recent 8%-9% levels. The fall in the metric was primarily seen in the Americas, and is attributable to the shift of Starbucks’ loyalty program from a frequency-based to a spend-based model. However, the company remains confident about this shift, expecting it to be a pivotal point for its business. This stems from the fact that it will likely eliminate in-store operating issues and order splitting, and result in increased speed of service and reduced line attrition.

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2. Success Of Cold Brew Coffee 

Despite the slowdown in comps in the Americas, revenue grew to  7% y-o-y.  This is likely a result of the success of cold brew coffee that Starbucks introduced earlier in the quarter, and the launch of Teavana handcrafted beverages.

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3. China To Be A Key Growth Market

China is one of the brightest stars in the Starbucks growth story. The company has almost 2,300 stores in over 100 cities in China, and continues to open more than one store a day. China outshone the other regions in the quarter, by posting 7% comps growth due to increased traffic. Further, China accounts for over 10 million of the 19 million Starbucks Reward members in China and Asia Pacific (CAP). To reinforce China’s growth potential, Starbucks has decided to open up a roastery in Shanghai in 2017.

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4. Europe, Middle East, and Africa (EMEA) Remains A Drag

Coming to EMEA, the region with the smallest presence revenue-wise, this was a low point for the company. Some of the factors that contributed to consumer uncertainty and thus, revenue losses in the region, are the slowing European economy, Brexit, a weakened British pound, and ongoing security concerns throughout the region.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Starbucks

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