Starbucks (SBUX, Financial), the world’s largest premium coffee house chain, reported first quarter results last week, posting adjusted earnings per share of 52 cents on the back of $5.73 billion in revenues. Though its EPS came in line with market expectations, Starbucks missed the revenues estimates by a wide margin, as analysts were looking for $5.85 billion this past quarter.
Shares edged lower after the earnings announcement as global comparable store sales grew 3% during the quarter, far lower than the regular above-5% growth the company averaged in the past several years. Same store sales in America grew 3% and China/Asia Pacific region grew by 5% while EMEA declined by 1%.
As you can see from the chart above, Starbucks' same-store sales have been weakening in the Americas segment over the past four quarters. In the first quarter, the Americas segment reported $3.991 billion, accounting for nearly 44% of its overall revenues.
Starbucks has stepped up to expand its presence in the CAP region, opening 303 net new stores compared to 251 stores in the Americas during the first quarter. But with only $770 million in revenues coming from the CAP region during the period, it will take many more years before this segment can provide the much-needed balance to Starbucks’ Americas-dependent revenue stream.
Same-store sales in the U.S. are still positive, but they are growing at far lower rates than they did. As if the pain of lower growth is not enough, same-store sales increased only because Starbucks increased its price during the quarter – not a sustainable way to improve same-store sales.
During the first quarter, transactions declined by 2% while tickets increased by 5%, resulting in 3% same-store sales growth. This will put a lot of pressure on the stock price in the short term, and the sooner Starbucks breaks out of the cycle the better it will be for the company.
“President Kevin Johnson noted that same-store sales growth was hindered, in part, by growing mobile pay and ordering.The soon-to-be CEO said during an earnings conference call that the bump in mobile ordering had caused many stores to experience congestion at the hand-off counter. Despite lines at the register being short, incoming customers would see the crowd and leave without making a purchase.
"We are now laser-focused on fixing this problem, but the nature of it, too much demand, is an operational challenge we have solved before and I can assure you we will solve again," CEO Howard Schultz said on a conference call.” – CNBC
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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