Starbucks (SBUX +0.95%) recently posted a growth uptick for its fiscal third quarter as its expansion pace improved to 4% from 3%. The coffee titan also boosted market share and managed key operating wins in its retailing and packaged goods segments.
That's the good news. The bad news for the business is that Starbucks' customer traffic was weaker than expected. The trend was soft enough, too, that it convinced management to lower their full-year outlook on both the top and bottom lines while announcing an aggressive strategic shift that emphasizes the company's international growth opportunities.
Image source: Getty Images.
What happened
Starbucks' overall revenue improved by 8% in the quarter thanks to an expanding store base and a 4% increase at existing locations. Over the past nine months, though, sales are up just 7% to put the company significantly below management's annual target of 10%.
The biggest factor in that slowdown has been a traffic slump that's demonstrating the beverage seller's sensitivity to negative trends that are pinching the retailing industry.
Customer traffic was flat last quarter in each of its geographic divisions. Sure, that marked a slight improvement over the prior quarter. And Starbucks' reported traffic numbers are being understated by changes it made to its loyalty program. However, the slowdown is significant, and it's part of a long-term trend.
2017 is through the first three quarters of the fiscal year. Chart by author. Data source: Starbucks financial filings.
Starbucks enjoyed an over 5% traffic surge in fiscal 2012 and 2013 but saw that metric slump to just 1% last year. Through the first nine months of fiscal 2017, transactions are running at a slightly negative rate.
Management's explanation
As for short-term growth expectations, the shift spurred executives to change their tone significantly in the space of just a few months. Back in late April, CEO Kevin Johnson and his team discussed encouraging operating trends that had them feeling "confident that we've turned the corner on U.S. comps ... and that we will deliver on our comp target for the full year despite the soft start."
This time around, though, they cited "choppiness" in the business last quarter and during the first few weeks of the current quarter. "Today's challenging retail and consumer environments," Johnson said in a conference call with investors, "has us taking a slightly more cautious view as we enter Q4."
Starbucks now sees growth coming in at the low end of executives' 8% to 10% guidance range as earnings expand by between 12% and 13% rather than the 15% to 20% goal.
Betting on food
Starbucks has several major initiatives in the works aimed at speeding its growth pace back up. Food is one of the biggest.
Image source: Getty Images.
Management is so excited about early results from their upgraded lunch menu tests in the Chicago area and that they are speeding up the timing of its launch in Seattle. Food accounted for a steady 19% of the business in each of the last two fiscal years. This past quarter that number jumped to 21% to add weight to executives' claim that the growth opportunity is large.
Increased food sales will likely push Starbucks' average spending higher, and its results over the past few years show that this improvement by itself can be enough to keep comps expanding.
But the key question is whether the company can also convince more customers to make trips into their local cafe. Unless customer traffic trends rebound, it's hard to see Starbucks sticking with its aggressive five-year growth plan that predicts 10% higher revenue each year as earnings spike by as much as 20%.
