Starbucks December Quarter Earnings Fail To Impress Markets; Future Outlook Weak

+10.13%
Upside
91.39
Market
101
Trefis
SBUX: Starbucks logo
SBUX
Starbucks

Starbucks Corporation (NASDAQ:SBUX) reported its December quarter results on January 26th, missing the consensus estimates for revenue. This was also reflected in the movement of company’s stock price post earnings release. The revenue growth at 7% y-o-y, although impressive given the challenging environment for restaurants and retailers, is conservative by Starbucks historical standards. The coffee giant attributes the relative moderation in growth to the slowdown it saw in comparable sales and growing mobile pay and ordering, which caused many stores to experience congestion at the hand-off counter.

2701178

The rise seen in revenues is mainly due to the increase in the store count in the quarter. However, a conspicuous downtrend is visible in the consolidated comps on a sequential basis. This downtrend is quite worrisome. After growing in the 4%-5% range in the three quarters of 2016, Starbucks comps fell to 3% in the December quarter. The comps in the U.S. region touched an all time low of 3% y-o-y. Although the company is confident about growing its comparable sales in the mid-single digit range in CY 2017, it remains to be seen if its strategies will actually pay off.
2701179
That said, Starbucks’ business model remains solid and fundamentally sound. However, the company has probably hit a new normal due to the headwinds being experienced by brick and mortar businesses everywhere. As compared to the peers, the company has shown significant growth in revenue and comps, but it fails to match its own historic superior performance.

Relevant Articles
  1. Down 7% Since 2023, Can Starbucks’ Stock Reverse This Trend Post Q1 Results?
  2. Down 26% From Its Pre-Inflation Shock High, What Is Next For Starbucks Stock?
  3. After 6% Drop This Year, Pricing Growth To Bolster Starbucks’ Q4
  4. Can Starbucks Stock Return To Pre-Inflation Shock Highs?
  5. Starbucks’ Stock To See Little Movement Past Q3?
  6. Starbucks Stock To Likely Trade Lower Post Q2

China The Only Bright Spot

In the last three years between FY 2013-2016, the company opened about 6,100 new stores in the CAP region. Of these, 2,300 were opened in China alone. The increased footprint led to a doubling of sales and tripling of operating income in the region. In line with this, Starbucks’ comparable sales for China and Asia Pacific (CAP) were up significantly, to 5% y-o-y, in the December quarter. The company continues to open a new store in China every 15 hours. It recently opened its 1,000th store in South Korea. The three key growth areas in the CAP region are China, Japan, and South Korea. Tea sales in the region grew as much as 40% in the quarter, indicating the success of Teavana in the region. Consequently, revenues in the CAP region were up 18% year over year. The region continues to see numerous store openings, in line with Starbucks’ plan to have 5,000 stores in China by 2021. Furthermore, the opening of first reserve roastery in Shanghai indicates the confidence and the growth potential the company sees in the country.

27011710

America Fails To Show Meaningful Growth

After notching a point higher to 5% y-o-y in the September quarter, Starbucks comparables in America reverted to 3% y-o-y. The company attributes the deterioration to the bump in mobile ordering and pay which caused many stores to experience congestion at the hand-off counter. However, Americas revenues continued to climb up, primarily due to the increase in the number of stores, the strength in its beverage sales (7% y-o-y) and food sales (8% y-o-y), and popularity of gift cards. Sales of beverages, food sales and the success of digital flywheel each contributed 1 percentage point to the comps. In terms of operating margins, the company saw a deteriorated in the period to 24%, likely due to higher investments in its employees. Going forward, the company hopes to grow its comps in America in mid single digits, through product innovation around nitro brews, ice teas, and sous-vide egg bites.

27011711

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

For a number of quarters now, the EMEA region has showcased anemic growth. Although Starbucks has talked about turning around its fortunes in the region on the back of its acquisition of Princi in the upcoming quarters, so far the downtrend has been persistent. The company has been unable to make its mark in Europe where the coffee culture is already very strong. Comparable sales in the region shrank -1% year over year in the December quarter, while revenues were down by 16%. The company attributes this fall in revenues to the shift towards licensed stores in the region. On a positive note, this shift towards licensed stores helped the company’s margins in the region, increasing 110 bps to 21.2% in the quarter.

27011712

Strength In Channel Development

Channel Development, consisting of Consumer Packaged Good (CPG) and Foodservice, came in strong in the December quarter, with revenues up 8% year over year. The growth was driven by increased sales of premium single-serve (K-Cups sales were up 10% y-o-y) and packaged coffee products and higher income from its North American Coffee partnership. Furthermore, the company grew its food service sales at an impressive pace. Supported by the growth in top line and lower cost of coffee, margins were seen expanding over 6 percentage points to 43.9%.

27011713

 

Have more questions on Starbucks? See the links below.

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

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology