Coffee giant Starbucks (SBUX, Financial) reported results for its first quarter of fiscal 2021 last week.
Revenues for the quarter declined 5% to $6.7 billion, which reflects the continued impact of the pandemic on the company's global operations. Global comparable store sales (comps) fell 5% in the quarter, with a 19% decline in traffic offset by a high-teens increase in average ticket. As shown below, while the mid-single digit decline in comps still leaves room for improvement, it's meaningfully better than results from the past few quarters.
U.S. comps declined 5% in the quarter, with continued traffic headwinds offset by higher ticket due to group orders, higher premium beverage mix (along with customization and upsizing), as well as an all-time high for food attach rate.
Starbucks has been able to weather the storm by focusing on mobile order and pay (MOAP), along with convenient order fulfillment utilizing drive-thru and delivery. In the first quarter, MOAP accounted for 25% of Starbucks' transactions in the United States, ten points higher than in the first quarter of fiscal 2019. In addition, active rewards members in the U.S. increased 15% to a record high of 21.8 million. Rewards members accounted for nearly half of all transactions at U.S. company operated stores in the quarter, also up ten points from the first quarter of fiscal 2019.
Despite cannibalization headwinds from footprint expansion, with the unit count in China up 13% year-over-year to more than 4,800 stores (and on pace for 600 net new units in 2021), comps increased 5% in the region in the quarter. China continues to experience significant adoption of MOAP, which accounted for roughly 30% of the business in the quarter (roughly split between delivery and pick-up). They also continue to add customers to their rewards program, with the number of members in China climbing 51% year-over-year to 15.4 million.
In the second quarter, management expects comps in China to nearly double (+100%). Given that they're lapping a 50% decline in the second quarter of fiscal 2020, that suggests the business will return to pre-pandemic levels in the near future (barring any additional shutdowns).
As I noted when the pandemic started, creating short-term pressures for Starbucks in China, these short-term pressures are turning out to be a non-event in the long run. At the time, I wrote the following:
"I don't think this is a material concern for investors. Even if these concerns (and closures) endure for months, I don't think that has any impact on the company's long-term prospects. As CFO Patrick Grismer noted on the conference call, 'We expect the impact to our business will be temporary. Our brand is very strong in China, and our confidence in the profitability and growth potential of this business is undiminished.'"
Today, with the benefit of hindsight, I think that has proven spot on. As CEO Kevin Johnson noted on the call, "The brand is stronger than ever in our fastest growing market."
The company's non-GAAP operating margins declined by 270 basis points in the quarter to 15.5%, primarily due to the continued impact from sales deleverage. That said, this was a nice step-up from the 13.2% margin reported in the prior quarter, which gives us some insight into how the margin profile of the business will evolve as the sales recovery continues.
Despite the better than expected results, management largely maintained 2021 guidance:
"Our strong start to the year provides optimism that we have the potential to exceed our full year non-GAAP EPS guidance, barring of course any new significant and sustained waves of COVID-19 infections and any major economic disruptions. However, given where we are at in our fiscal year (three quarters to go) and considering that we're continuing to see volatility from the pandemic, we believe it's prudent to provide a comprehensive guidance update with our second quarter earnings, by which time we'll have much better visibility to full year results."
For the year, management continues to expect non-GAAP earnings of $2.70 to $2.90 per share, inclusive of a $0.10 benefit from the 53rd week. As shown below, this implies that fiscal 2021 earnings will be roughly in-line with fiscal 2019 earnings.
Looking to the future, it appears Starbucks is using short-term uncertainty as an opportunity to capitalize on the long-term opportunity in markets like China (both by entering new markets, as well as by evolving the go-to-market strategy). In addition, they continue to efficiently operate in well-established markets like the United States while tweaking the model to better serve customers ("When we look at our most productive model, it's drive-thru's.").
In summary, I continue to believe that this is a high-quality company that can increase per share profitability at an annualized rate of 10%+ for the foreseeable future. I would like to own it at the right price (and clearly missed a chance to do so in early 2020). For now, I'm likely to remain on the sidelines – but that could change quickly if the stock price declined 20%+.
Disclosure: None
Read more here:
- Apple: Off to the Races in Fiscal 2021
- Comcast: A Fitting End to a Tough Year
- Facebook: Growth Amidst Uncertainty
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