Starbucks Witnesses Lowest Comps in Nearly a Decade

Starbucks’ third-quarter report was lackluster with the majority of its earnings hitting close to investors’ cautious estimates.

Global same-store sales were up 1 percent, compared with a prediction of 0.8 percent per Zacks Consensus Estimate. It’s a somewhat hollow victory given how the first two quarters of 2018 were up 2 percent, which was already a notable decline from previous years. True to fashion, Starbucks was proactive with this information, telling investors a month ago that it anticipated the quarter to bring the lowest comps since the company began sharing financials on its investor site in 2011.

Looking to the end of the fiscal year, Starbucks expects similarly muted results with comps clocking in below the usual 3–5 percent range for both the fourth quarter and full year.

Earnings per share hit 62 cents, or 2 cents higher than anticipated by Zacks, but revenue faltered, reaching only $6.23 billion compared with Wall Street’s forecast of $6.25 billion.

Foot traffic has been essentially flat in recent years and if not for higher tickets, comps could have slid into the red. A mix of larger orders and higher prices may be boosting sales, but per its own account, Starbucks plans to cut costs. Lower prices could increase the number of purchases, but it also runs the risk of cancelling out the gains from those pricier items.

“While we fell short of the expectations we had entering the quarter, we made measurable progress against two commitments we've made to our shareholders: to deliver predictable, sustainable growth at scale and to create meaningful increases in shareholder value long into the future,” said CEO and president Kevin Johnson on a July 26 investor call.

Perhaps the most disappointing news for Starbucks and its investors came from China, which has long been viewed as a massive market with nothing but potential for the global coffee leader. Analysts estimated same-store sales to grow 0.4 percent, but instead it dropped 1 percent. Still, the company shows no sign of retreating. In May, it announced it would hit 6,000 stores by 2022, whereas the previous (already ambitious) target had been 5,000 by 2021.

“While acknowledging a disappointing Q3, I want to be clear that we have 100 percent confidence in our growth strategy and the sustainability of the leadership position we have built in [China],” Johnson said.

Although Starbucks has had a presence in China for nearly two decades, it has lagged on delivery in that market. This fall, the company will pilot a program in Beijing and Shanghai with plans to expand the service across China in 2019.

“The delivery opportunity has enabled a different yet not unusual competitive retail environment in China. Starbucks' success, growth and sustainable long-term business approach has incented upstarts and other players to enter the coffee business from time to time,” said Belinda Wong, CEO of Starbucks China, who dialed in from Shanghai. She added that in the long term, Starbucks’ quality products and passionate operators would ensure the chain’s victory over competitors.

Stateside store growth estimates are less optimistic. At the Oppenheimer 18th Annual Consumer Conference in June, Johnson had called Starbucks’ recent performance “unacceptable.” He had also laid out a plan to close 150 corporate-owned stores in 2019 (triple the usual number of closures) and slow licensee growth, but that point was hardly addressed during the investor call.

"We'll significantly enhance the appeal of the rewards program next spring when, for the first-time, customers will be able to redeem different amounts of stars for different products, giving them a choice to use stars sooner for lower ticket items or save for higher ticket items like lunch, packaged coffee, and merchandise." — COO and group president Rosalind Brewer.

One bright spot in the U.S. for Starbucks came in the form of digital engagement. The Starbucks Rewards loyalty program now counts 15.1 million active members—a 14 percent increase from a year ago—and 13 percent of all transactions are made via Mobile Order and Pay. The brand has engaged 6 million new digitally registered customers who are not yet Rewards members, suggesting no shortage of white space in digital and loyalty.

“We'll significantly enhance the appeal of the rewards program next spring when, for the first-time, customers will be able to redeem different amounts of stars for different products, giving them a choice to use stars sooner for lower ticket items or save for higher ticket items like lunch, packaged coffee, and merchandise,” said COO and group president Rosalind Brewer.

Starbucks started the quarter in an unwanted spotlight. The previous earnings call came just a week after two black men were arrested at a Philadelphia-area store after the store manager called the police because they had not placed an order. The company swiftly responded to the incident by shutting down all U.S. stores to hold racial-bias training for employees May 29. Starbucks reached a settlement with the two men, and Johnson flew to Philadelphia to meet with them personally.

On the leadership side, CFO Scott Maw announced in June he would be retiring in November after more than four years in his current role and seven with the company. The news dovetailed with former CEO Howard Schultz’s departure from the board of directors after 40 years with the company. Although Schultz literally handed the keys to the coffee kingdom to Johnson in spring 2017, the former chairman has remained a central figure to the brand and even spokesman at times, publically weighing in on company matters.

Ever the champion of causes, Starbucks did push new initiatives during the third quarter. Earlier this month it announced a “Signing Store” that would be led by deaf employees in Washington, D.C. and joined an industry-wide environmental movement by pledging to remove plastic straws from all 28,000 restaurants.

“Our commitment to eliminate plastic straws in all of our stores globally by 2020 is in direct support of sustainability of the planet. In the same way, our agronomists innovate on behalf of coffee farmers, our packaging teams along with partners have innovated to create strawless lids and alternative-material straw options. And we are also pursuing a broad approach to recyclable cups,” Johnson said on the call. “We have long espoused the importance of companies doing well by doing good, and we will not waver from our focus and leadership position in sustainability.”