As of 12:25 p.m. EST on January 26, shares of Starbucks Corporation (NASDAQ:SBUX) are down 6% on very heavy trading. With several hours still remaining in the day, more than 30 million shares have already traded hands, more than triple the average daily volume. The big catalyst for today's active selling was the company's fiscal first-quarter 2018 earnings report, released after market close on January 25.
In short, Starbucks reported 6% sales growth and 25% adjusted earnings-per-share growth, delivering a record $6.1 billion in quarterly revenue and a strong profit result. However, continued fears that the world's biggest coffee chain is losing traction in its biggest market -- the U.S. -- are weighing heavily on investors today.
According to the earnings release, same-restaurant sales -- also called comps -- increased 2% in both the U.S. and on a consolidated basis. This was short of the company's own 3%-5% internal target and analyst expectations for 3%-plus growth. In the U.S., which generates a significant portion of total sales and earnings, customer traffic has been stagnant for multiple quarters, with the comps growth a product of increased order size.
On the earnings call, CEO Kevin Johnson said Starbucks' U.S. comps were 3% in the first half of the quarter, with "strong performance at peak more than offsetting some softness in the afternoon." But as the quarter progressed into the peak holiday shopping season from mid-November through year end, comps fell to 1% growth. Even more concerning was that transactions actually declined slightly during this part of the quarter.
Johnson said two main things were responsible for the weak comps and decline in transactions: weak sales of holiday beverages and merchandise versus typical historical results, and fewer visits from more occasional customers. It's likely that the decline in visits from less regular customers contributed to the decline in holiday beverage and merchandise sales. Specifically, Johnson pointed to Starbucks locations that count on traffic from other retailers to drive sales during non-peak hours:
... the challenge we have discussed with you over the past several quarters involving softness in visits by occasional non-Starbucks Rewards customers -- a challenge likely exacerbated by the traditional changes in customer routines and traffic patterns during the holidays -- continued, with our afternoon and evening dayparts typically catering to less frequent customers and second visits for more frequent customers, coming under increased pressure as the quarter progressed. Another proof-point of changes in holiday routines was negative mall-store comp performance, several points below non-mall locations as we move through the quarter.
Johnson also went on to point out that mall-based stores only make up 6% of U.S. operations, but it's likely that many of its other locations also felt some impact with fewer shoppers out and about during the holiday season.
Flat traffic and weakness during off-peak hours is showing that Starbucks isn't immune from the e-commerce trend, but it is still producing growth. Furthermore, the company said its food comp was 2% and beverage comp was 1%, while a 1% drop in sales of holiday merchandise and limited-time items pulled the final result to 2% growth. This should bode better for the company's future, less holiday-affected sales quarters.
Food, particularly, should be noted as a positive, since this has been a key focus for Starbucks for a number of years. If the company can continue to find momentum in growing food sales, this could help it expand sales during afternoon and evening hours.
Let's also not forget about China, which has the potential to become the company's biggest market and is clearly where management is aiming to invest in aggressive expansion. It will take time to build up enough scale to offset any future weakness in U.S. sales, but it may be needed if the company continues to struggle with U.S. comps growth.
Lastly, Starbucks shares trade for 17 times the low end of guidance for 2018 GAAP earnings, and less than 23 times the low end of adjusted 2018 EPS guidance. If the company can reach its own near-term goals, stabilize its U.S. results, and continue accelerating its international growth, today's price could look pretty cheap in a few years.