Starbucks To Showcase Strong Performance In The December Quarter, Driven By Its Core Business
Starbucks (NYSE: SBUX) is scheduled to announce its December quarter, or first quarter FY 2017 earnings, on 26th January, 2017. In the September quarter, the company grew its revenues by 16% y-o-y and earnings by 26% y-o-y. The growth in earnings is attributable to the company’s strict fiscal discipline, which not only supported margins but also the bottom line. The only region to disappoint in the quarter was EMEA. In the upcoming quarterly results, the trend of rising revenues and earnings is expected to continue, despite tough industry dynamics. In the following note, we discuss some of the key trends that can be expected to be seen in the upcoming quarterly results.
Key Trends:
- Although in the June and September quarter comps were seen to be stagnating at 4% y-o-y, 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. Furthermore, the Americas saw its comps notch a point higher to 5% year over year in Q4’16. The slight improvement is attributable to the strength in the beverage and breakfast sandwich line up.
- The industry-wide slowdown in the restaurant sector continued in the fourth quarter. Restaurants have now posted four consecutive quarters of declining year-over-year sales. This is due to a fewer number of people eating out, and most of the consumer spending going towards big ticket purchases rather than soft goods. However, Starbucks largely remains isolated from this slowdown due to the stickiness of its product. The following table gives a summary of the declining comps and traffic in the three months of the fourth quarter.
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- An estimated 6 out of 10 Americans aged 25-39, and 4.8 out of 10 Americans, aged 18-25, consume at least one cup of coffee a day. According to the International Coffee Organization, the global demand for coffee is expected to rise 1.2% from Oct’16 to Oct’17, with its popularity growing in the traditionally tea-drinking countries of China, India, and Japan. This is likely to help the company propel its revenues upwards.
- Challenging consumer, economic, and geopolitical environment across EMEA may continue to be a drag on the company’s performance in the region.
- The company’s digital strategy, digital flywheel, is expected to increase Starbucks average ticket size. The main flaw with Starbucks’ Mobile and Pay system was the lack of displays which led to lower impulse buys and thus lower ticket size. By means of simplifying its digital strategy the company hopes to cover up the difference between digital and in-store purchases, resulting in less order splitting and higher spend. It believes its new reward program to be fairer as it rewards customers on the basis of the amount spent.
- Starbucks has secured 15% of the 20% total at-home coffee share at the top three retailers it sells its products through. This leaves it with a 5% opportunity to further grow at these retailers alone, corresponding to $400 million in net revenue. By means of local partnerships, such as Dongsuh and Suntory in China, Arla in Europe, and PepsiCo in America, the company’s reach across the ready-to-drink industry is already matchless. Through innovation within the single serve segment (K-cups), such as making the capsules compatible with Nespresso machines and offering Stars with CPG products, the company hopes to tap into the huge opportunity available in the ready-to-drink tea and coffee market.
- The Americas has been the single biggest market for Starbucks. This is despite worries that the U.S. market is mature and its growth in the region has reached saturation levels. In the next five years the company wants to open approximately 5,000 new stores in the area, in the form of drive-thrus, express stores, and kiosks. The management also mentioned that it will be renovating and relocating close to 7,000 stores in the same period. Consequently, the company forecasts a revenue growth of 10% y-o-y until FY 2021.
- To reinforce China’s growth potential, Starbucks has plans to open up 2,500 new stores in the region in the next five years, and doubling its footprint to 200 cities. Consequently, the management expects the revenue and operating income to triple. 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, China’s middle class is expected to double to 600 million by 2022 and its total population to over 1.4 billion (forecast according to the Economist Intelligence Unit) in 2030. This will result in 89% of the population being able to afford a regular cup of coffee from Starbucks, as opposed to approximately 60% right now.
- The higher dependency on China may impact Starbucks’ top-line considerably, given the strength in the U.S. dollar as compared to the Chinese yuan. The foreign exchange headwinds to be expected from this move are likely to slightly offset the company’s sales.
- Since the very beginning, Starbucks has been a pioneer in innovation. Its products are generally copied by the likes of Dunkin’ and McDonald’s McCafe. The company strongly believes that innovation in product offerings is the main factor driving financial performance at stores. The nitro brews are expected to be the next driver for comps at Starbucks.
- 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.
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:
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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