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Starbucks (NASDAQ: SBUX ) shares advanced 2% on Friday after the company released its first-quarter results the day before. The market's positive reaction to the earnings report reflects the company's strong quarter, but not everything went exactly as planned. Three key issues discussed on the company's conference call offer important indications of things to come.
Slower comps growth
Starbucks' U.S. comp sales growth came in at 5% -- slower than last quarter's 7% comp sales growth. The slowdown was partially due to lower retail traffic in December, as more customers preferred to shop online instead of going to the mall. As CEO Howard Schultz said, "Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way."
Starbucks' mall-based stores were hit hard by the slowdown in retail foot traffic, but the majority of its stores are not located in malls. This suggests that Starbucks' stand-alone locations also lost steam in the quarter, a revelation that does not reflect well on the ongoing rollout of La Boulange. The new food menu is supposed to drive traffic at lunchtime and in the afternoon; midday and afternoon traffic growth outpaced that of other dayparts, reflecting the effectiveness of food in driving more traffic. However, slower comps growth in the middle of the La Boulange rollout suggests that investors should not expect game-changing growth from this category anytime soon.
Starbucks Card is growing in popularity
Starbucks' revenue grew 12% in the first quarter to a record $4.2 billion. Not included in this figure is deferred revenue from gift card sales and Starbucks Card reloads, which increased $230 million from the prior year's quarter. Consumers activated more than 2 million new Starbucks cards every day in the lead-up to Christmas; the total dollar amount loaded on Starbucks Cards is now $1.4 billion. That's $1.4 billion in future revenue ready to be spent by Starbucks customers.
According to the company, a large portion of the millions of Starbucks gift card recipients are new customers. As a result, many new people will be introduced to the Starbucks Experience over the next few months, driving traffic increases and higher comps growth.
Teavana has enormous potential
Schultz has turned into a tea evangelist. He boasts that Starbucks "will do for tea what [it] did for coffee." Clearly, Schultz has high hopes for Teavana, the luxury tea company that Starbucks acquired in 2012. The $90 billion global tea market represents an enormous growth opportunity; Teavana's number of locations, 338 as of September, will rapidly expand to more than 1,300 in the next five years.
On the first-quarter conference call, Schultz remarked, "[W]e are more convinced than ever that we have the opportunities to transform the tea category to the way we have transformed coffee all around the world." He also announced that Teavana has the highest consumer brand awareness among super-premium teas.
Although it is difficult to gauge the precise impact Teavana will have on Starbucks' overall results in the coming years, investors should be excited that Teavana's growth model looks a lot like Starbucks'. Namely, it is opening flagship locations in New York and Seattle to shape the brand's image, then it will roll out scalable store models across the rest of the country. This is similar to Starbucks' model of building unique, upscale flagship stores in high-traffic areas but building cost-efficient models to drive profitability in most locations.
Slower comp sales growth is concerning, but investors should hold their judgment until a definite trend emerges. Comp sales growth may receive a boost over the next several quarters as more customers become aware of Starbucks' new food offering and gift card recipients redeem their gifts.
Management raised fiscal 2014 earnings-per-share guidance to a range of $2.59 to $2.67 on the back of the strong first-quarter earnings result. The stock trades at 28 times the high end of this range, but double-digit earnings growth and higher comp sales growth in the quarters ahead could justify the high price.
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