Was the 3rd Quarter Comps Dip Truly an Anomaly for Starbucks?

At the next earnings call, we will have validation of that

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Oct 26, 2016
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Starbucks (SBUX, Financial), possibly the best premium coffee house chain there is, has not done too well this year. During the third quarter, the company reported less than 5% comps in the United States, the worst growth in several years, and the stock has been under pressure ever since, losing 10% of its value since the start of this year.

Howard Schultz, CEO of Starbucks, called the last quarter an anomaly because the last time Starbucks' same-store sales in the U.S. dipped below 5% was nearly 25 quarters, or six years, ago. Despite having a significant number of stores in the country, which kept steadily increasing over the years, Starbucks was always able to keep its same-store sales numbers moving.

Understanding the mechanics of comps growth

What was even more worrisome in the third quarter numbers was the way same-store sales growth was achieved. Same-store sales growth depends on two factors: how many more people walk into the store this quarter compared to the last, and how much extra they were willing to pay. The first one shows that the company is in demand, and the second one shows the company’s ability to pass on price increases to its customers.

No company can rely on just one of those factors and keep things moving. They are both important, the first one a little bit more so than the second. As companies mature and penetration increases, both these numbers can move up and down, compensating for each other, protecting margins on downturns and improving profitability during boom times.

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Was the third quarter an anomaly as Schultz claimed?

As you can see from the table above, Starbucks same-store sales was driven by change in transactions and change in ticket (price increases). In the first two quarters, both the metrics increased, which is good, but in the third quarter the 4% increase came from change in ticket alone. The change in transactions was zero, which is not a good sign at all.

Though Schultz called it an anomaly, that claim will only be validated if fourth quarter results once again show a 5% comps growth or higher. More importantly, the company needs to show transaction growth. When the company releases its fourth quarter results on Nov. 3, those are the two numbers that I will be looking for where the U.S. market is concerned.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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