Starbucks (SBUX +1.44%) has successfully turned the simple concept of a coffeehouse into a global empire, with thousands of locations in the U.S. and around the world. Yet even with such an impressive growth history in the rearview mirror, Starbucks still has to demonstrate to investors that it has the capacity to sustain that growth going forward.
Coming into Thursday's fiscal first-quarter financial report, Starbucks investors expected solid gains in revenue and earnings. But even though Starbucks posted record results for the holiday quarter, the extent of its growth wasn't as big as many had hoped for, and some disappointing figures pointed to possible headwinds for the coffee giant looking ahead. Let's look more closely at Starbucks' quarter to see what might lie ahead for the company.
Image source: Starbucks.
Starbucks cools off
Starbucks' fiscal first-quarter results didn't live up to the high expectations that investors had for the company. Revenue climbed almost 7%, to $5.73 billion, but that was well short of the $5.85 billion consensus forecast among those following the stock. Similarly, net income climbed 9%, to $751.8 million, and that produced adjusted earnings of $0.52 per share. But that only managed to match what most investors were looking to see from the coffee giant rather than surpassing expectations.
Looking more closely at Starbucks' results, one key aspect of the coffeehouse chain's pace of growth was in its relatively sluggish comparable-store sales figures. Globally, Starbucks saw comps grow 3%, with a 5% jump in the China and Asia-Pacific region. In the Americas, comps matched the global figure of 3%, while a 1% drop in Europe, the Middle East, and Africa offset stronger results elsewhere.
U.S. comparable-store sales were also up 3%, with a 5% jump in average ticket amounts getting offset by a 2% decline in transaction counts. Starbucks explained that its new loyalty program encouraged order consolidation, suggesting that, on an adjusted basis, transactions were flat, with gains due solely to rising average ticket amounts.
Operationally, Starbucks enjoyed some successes. Starbucks Cards continue to become increasingly popular, making up two-fifths of all transactions in the U.S., and customers had $2.1 billion loaded on their cards, a new record. The company increased the number of members in its Starbucks Rewards loyalty program to 12.9 million, up 16% compared to this time last year.
Initiatives to encourage greater technology in the ordering-and-payment process were also successful, as the percentage of transactions using mobile order and pay more than doubled, to 7%, during the quarter. Mobile payments have become much more common, climbing to more than a quarter of all Starbucks transactions within the U.S. during the period. Starbucks continued expanding its network, adding almost 650 net new stores, to bring its total to more than 25,700 in 75 different countries.
CEO Howard Schultz was pleased with the company's results. "Starbucks is engaging more deeply and more frequently and expanding its base of loyal customers faster and more consistently today than ever before," Schultz said. The CEO also pointed to the value of the Starbucks brand in building word of mouth that contributes to the coffee company's ability to grow both into new markets and within existing market niches around the world.
Can Starbucks perk up?
Looking ahead, Starbucks sees plenty of growth left for the future. The coffee company repeated its strategic plan initiatives, including an increase of 12,000 stores by fiscal 2021, digital innovation to support its existing efforts further, and the rise of Roasteries and Starbucks Reserve stores to meet demand from the ultra-premium market.
Yet Starbucks' financial guidance wasn't entirely earth-shattering. The company reiterated most of its past full-year fiscal 2017 guidance, including 2,100 net new stores, mid-single digit growth in comps, and adjusted earnings of $2.12 to $2.14 per share. However, Starbucks said it now expects revenue growth of between 8% and 10% for the full year, down from its previous prediction for double-digit percentage gains. Combined with the sluggish comparable-store sales growth for the first quarter -- its lowest in eight years -- some investors are at least slightly concerned that the pace of past gains for the coffee chain might be ending despite the company's growth strategies.
In response, Starbucks stock lost ground, falling more than 3% in after-hours trading following the announcement. The big question facing Starbucks going forward is whether it can use high-growth regions like China and potential expansion opportunities like the upscale Reserve Roastery concept to accelerate revenue and profit gains. If it can, then investors will be pleased to see the resulting boost to growth that will follow.
