Starbucks Misses Estimates In Q3 2017, Lowers Full Year Guidance

After two straight quarters of slowing comparable sales growth in the U.S., Starbucks’ (NYSE:SBUX) Q3 2017 results, which were announced on July 27^th, were encouraging. While the company missed consensus estimates on earnings per share (EPS) – which stood at $ 0.47 as against an expected number of $ 0.55, comparable sales grew at 5% in the U.S., higher that the 3% number for the past two quarters. However, this growth was entirely due to higher ticket sizes and not due to an increase in traffic, indicating that the company was not able to attract new customers to its stores.  Below is a summary of the company’s financial performance for Q3 2017:

The above 8% year on year growth in revenues was due to an increase in comparable sales and revenues from new stores opened during the year. Below is a summary of comparable sales growth for the company in Q3 2017:

The entire growth in comparable sales is attributable to an increase in ticket size and there has been no change in the number of transactions. While the company has shown significant improvement in comparable sales growth in the U.S. and EMEA (Europe, Middle East and Asia), the China/Asia Pacific segment has been disappointing. This is despite a 7% increase in China comparable sales growth driven by a 5% increase in transactions, which was offset by softness in Japan.  Below is a summary of the company’s regional performance in Q3 2017:

Going Forward:

Starbucks announced certain strategic decisions in this quarter as it looks to drive long term growth:

• The company is assuming full ownership of its Mainland China market by acquiring the balance 50% of Shanghai Starbucks Coffee Corporation, which it already did not own. As the company looks to drive growth in China, it appears to be preferring a company operated model in the region, as it gives the management more control over execution and innovation in the region.
• Starbucks is closing down all its 379 Teavana retail stores by the spring of 2018 as this segment continues to underperform. However sales of Teavana branded beverages continue to grow at its restaurants and the company plans to continue innovating in beverages of this brand.
• The company is working on updating its digital ordering and payment platform and new functionalities include a guest checkout feature for first time users. This will give it access to a new pool of customers who do not want to store their personal information on the app.
• Based on the choppiness in results for Q3 and early Q4 the company revised its full year GAAP EPS to now be in the range of $ 1.96 and $ 1.97 and revenue growth to be in the lower end of its guidance of 8% to 10%.

We will be updating our model based on these results which can result in a change to our price estimate for the company.

For more details, see our complete analysis for Starbucks

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