Starbucks Misses Revenue Expectations For Q1 2018, Comparable Sales Disappoint Again

Starbucks (NASDAQ: SBUX) reported its Q1 2018 results on January 25^th 2018 and the company fell short of consensus revenue expectations, reporting a 6% year on year growth in revenues, against the expected 8%. Comparable sales growth remained at 2% (in line with the numbers in 2017) despite strong comparable sales of 6% reported in China. The growth in comparable sales was due to an increase in ticket size and the company could not generate additional traffic in stores.

The charts below summarize the company’s comparable sales growth in the past four quarters:

The company has attributed the low comparable sales growth in the Americas due to disappointing holiday sales  (holiday merchandise and limited time offers) and negative mall store comps. However, the company stated that it has a clear understanding of this issue and is prepared to fix this problem going forward. Starbucks is working on several initiatives to drive sales including food and beverage innovation. In stores where it is offering the Nitro cold brew, the company has seen a 1 point additional comp growth.  It now plans to roll out Nitro cold brew to 2,300 U.S. stores by the end of the year.

The charts below summarize the company’s year on year revenue growth (region-wise) and operating margin performance:

You can click here to access these charts and modify the region-wise revenue numbers to see their impact on the total revenue.

Going Forward:

• Starbucks has expanded its capacity at peak and is now able to offer its Mobile Order and Pay capability to all customers. The company is increasing its marketing efforts to expand its digital customer relationships in the first calendar quarter of 2018. This is likely to impact customer traffic and transactions positively.
• China continues to remain a long term growth driver for the company, with its GDP expected to exceed $15 trillion by 2021. Starbucks’ partnership with Alipay and WeChat in China and its recent East China acquisition are likely to aid the company in taking advantage of the growing middle class in the country – which is its major customer base.
• The East China business will be reflected in Starbucks’ financials from Q2 2018. The company expects this transaction to be neutral or slightly accretive in 2018 and expects to see a more positive impact of this transaction in 2019.
• The changes in the U.S. tax laws are likely to impact Starbucks positively. The company expects the effective tax rate to be 7 points below its earlier guidance, leading to a slightly higher EPS (Earnings per share).
• With the challenges faced in Q1 2018, the company expects to be in the lower end of its long term comparable sales guidance (3-5%) in 2018 and expects total operating margins in the Americas to decline moderately compared to the previous year.

We will be updating our model based on these results and the guidance issued and this can lead to a revision in our price estimate for the company.

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