Starbucks growth plans include its upscale Reserve Roastery stores, taking the coffee experience to a new level. Image source: Starbucks.
Starbucks Corporation (SBUX +0.91%) announced fourth-quarter and fiscal year 2016 financial and operating results on Nov. 3, delivering an even better result than in a third quarter that was largely viewed as less than stellar. The end result? A record-setting quarterly profit, solid sequential improvements in several key operating metrics, and strong guidance for 2017 from management.
The cherry on top? A 25% increase in the company's quarterly dividend.
However, all wasn't perfect, and there's one thing in particular investors need to keep an eye on going forward: traffic in U.S. stores. With that in mind, let's take a closer look at Starbucks' results.
Financial results
Fourth quarter:
| Metric | Q4 2016 | Q4 2015 | Change (YOY) |
|---|---|---|---|
| Revenue | $5,711 | $4,915 | 16.2% |
| Net income | $801.00 | $652.50 | 22.8% |
| Earnings per share | $0.54 | $0.43 | 25.6% |
| Operating margin | 21.50% | 19.70% | +180 BPS |
Revenue and net income in millions. Data source: Starbucks Corporation. YOY = year over year.
Full fiscal year:
| Metric | Fiscal 2016 | Fiscal 2015 | Change (YOY) |
|---|---|---|---|
| Revenue | $21,316 | $19,163 | 11.2% |
| Net income | $2,817.70 | $2,757.40 | 2.2% |
| Earnings per share | $1.90 | $1.82 | 4.4% |
| Operating margin | 19.60% | 18.80% |
+80 BPS |
Revenue and net income in millions. Data source: Starbucks Corporation. YOY= year over year.
It's worth noting that the full-year net income growth may look paltry, but that's in large part because of the $390.6 million non-cash gain the company recognized in 2015 related to the acquisition of a joint venture, which somewhat artificially inflated (since the gain wasn't generated by operations) last year's net income growth.
A closer look at the operating performance
Here's how Starbucks delivered in several key operating measures during the quarter:
- Global comps were up 4%; Americas comps were up 5%; China's comps were up 6%.
- Comps were flat-to-improved in every region except China/Asia-Pacific, which reported 1% comps growth in Q4.
- It's worth noting that essentially all of that comps growth came from higher prices. Traffic (as measured by tickets) was either flat or down 1% in all segments.
- Starbucks opened 690 net new stores; this was 166 more than in the year-ago quarter. 623 of those were in Americas and China/Asia-Pacific.
- Consolidated operating income increased 27% to $1.23 billion, primarily because of increased sales leverage in Americas and China/Asia-Pacific, and lower costs and higher income from the Channel Development segment's joint venture with PepsiCo, the North American Coffee Partnership.
- Channel Development continues to be an outsize profit driver, generating 9% of revenue but 20% of operating income.
- Mobile Order & Pay continued gaining more use: 6% of U.S. transactions were via the app, up from 5% sequentially.
That one thing to watch: Store traffic
As I noted above, the comps results were mostly good in terms of higher sales results, but investors should understand that, according to Starbucks, traffic was actually flat in China/Asia-Pacific stores and EMEA, and it actually fell by 1% in Americas. Bottom line: If a company is only gaining growth by charging the same -- or even worse, fewer -- customers more money, that may not be a sustainable source of long-term growth.
So, should investors be concerned? Maybe not, at least according to Starbucks' management. Here's one of the first disclosures from the earnings release (emphasis mine):
U.S. comparable store sales increase of 4% was comprised of 6% increase in average ticket and 1% decrease in traffic. After adjusting for the estimated impact of order consolidation related to the new Starbucks Rewards loyalty program, average ticket grew 4% and traffic grew 1%.
On the earnings call, President and COO Kevin Johnson offered even more detail:
Our U.S. comps included a 6% increase in ticket and a 1% decline in transactions resulting from a shift in customer behavior away from order splitting and toward order consolidation. This follows a foundational change we made to our Rewards program, taking it from a frequency-based to a spend-based model. While neutral to revenue, we estimate the impact of order consolidation drove transactions down by approximately two points and ticket up by approximately two points.
It's important to note that this conversion from transaction to ticket reflects customers choosing to put multiple items on one ticket rather than an actual decline in traffic in our stores. And this will persist in our comp results until we lap the transition to the new Rewards program.
In short, Starbucks' reported traffic measure is a count of orders, not actual customers, and if what Johnson is saying holds true, revenue was flat to slightly up at company-owned U.S. stores in the quarter.
Lastly, it's worth noting that comps is an incomplete measure for Starbucks' traffic and sales trends since it only measures company-owned stores. This is especially true in both China/Asia-Pacific and EMEA, where the company's strategy is for around two-thirds and virtually all of net new stores, respectively, to be owned and operated by licensees. Even in the Americas, the company plans for about half of net new stores opened in 2017 to be licensed.
Looking ahead
On the heels of what turned out to be a strong year of growth for Starbucks, the company is setting a high bar for 2017. Guidance is for comps to grow in the mid-single-digit range again, consolidated operating margin to increase again, and non-GAAP earnings per share to grow 15%-16%.
However, investors should be aware that the first quarter's earnings are expected to be between $0.50-$0.51 per share, which would be "only" 9%-11% higher than the year-ago quarter. But before you fret, there's a legitimate reason: The front-loaded nature of some of the company's planned increased investments in employee-related expenses, just as last year, will more heavily impact Q1 than the rest of the year.
Management is also ramping up growth even further, with plans to open 2,100 net new stores in 2017. Of that count, 1,000 are planned for China/Asia-Pacific, with the company committed to opening "at least" 500 net new stores in China alone yearly for the next five years and 800 net new stores in the Americas.
Bottom line: Starbucks' comps may have moderated a little bit, but there's a lot more investors should watch than that single -- and incomplete -- data point. Overall, it seems pretty clear that the growth story won't be coming to an end anytime soon.
