Starbucks (NASDAQ:SBUX) stock finished Friday trading about 4% lower after the company's first-quarter results for fiscal 2018 missed expectations. Bearish sentiment toward the stock was likely due to the company's worse-than-expected revenue and comparable-store sales growth. First-quarter revenue was $6.07 billion, up 6% year over year. On average, analysts were expecting revenue of $6.18 billion. Global comp store sales increased 2%, short of expectations for a 3% rise.
But there was more to Starbucks' first quarter than its lower-than-expected revenue and comp store growth. During the company's first-quarter earnings call, Starbucks shared some insightful perspective on its important China market, its digital efforts, and food sales. Here are some key quotes from the call.
Strong growth in China
Starbucks' comp sales growth of 2% may have been below what analysts were expecting, but this performance shouldn't cause investors to overlook the company's growth engine that remained strong during the quarter: China.
Investors have good reason to be keenly interested in Starbucks' performance in China. Not only is it the company's second-largest market after the U.S., but China is consistently the coffee company's fastest-growing market. This rapid growth continued in Q1, with China comp store sales increasing 6%. The boost was "driven entirely by increased transactions and 30% revenue growth," said Starbucks CEO Kevin Johnson.
Thanks to expectations for massive GDP growth and ongoing digital efforts to boost sales in the market, Starbucks believes China will become the company's most important segment in the future, Johnson said.
The growing relevance and success of our international business and, specifically, our business in China, has emerged as a growth driver that is rapidly moving us beyond our long-standing dependence on our U.S. business for needle-moving growth.
Johnson noted that Starbucks middle class is expected to reach 600 million by 2021 -- twice the size of the U.S. Highlighting the incredible growth in its digital adoption in China, the CEO cited a threefold year-over-year increase in e-commerce and social gifting in the market to $20 million during Q1.
Starbucks said "strong digital performance" was one of its highlights during the quarter. Specifically, Johnson said:
We added 1.4 million active Starbucks Rewards members in the U.S., up 11% year-over-year and now have 14.2 million active members. Mobile payment in the U.S. has grown to over 30% of total tender.
Looking ahead, Starbucks plans to "materially expand" its digitally connected Starbucks customers beyond its Rewards members. Indeed, by the end of fiscal 2018, Starbucks said it expects to have "millions of incremental digital relationships outside of Starbucks Rewards." So, investors should look for updates on this progress throughout fiscal 2018.
Food has been a key driver for Starbucks business -- not just in the U.S., but also globally. In China, for instance, management said its comp growth in the market was driven by strong performance in both beverages and food.
And management insists there are big incremental opportunities for food on the horizon. For example, Starbucks opened its Princi Bakery and Cafe in its Seattle Roastery in November and saw significant success, Johnson explained:
The artistic nature and high quality Princi baked goods are resonating loudly with our customers and we see a major opportunity to increase sales of Princi food beyond Roasteries. We are now venturing into building stand-alone Princi Bakeries, complete with Starbucks Reserve coffee and coffee bars.
Of course, Starbucks Roasteries and Princi bakeries are far in between. But this hasn't stopped management from getting excited about the opportunity. Johnson continued:
We currently have four Roasteries under construction and the potential opportunity for Princi Bakeries with Reserve coffee over the next decade. The opportunity is significant as we're off to an excellent beginning to what we believe is an emerging food revenue and profit stream over time.
Despite strong performance in China and robust opportunity in the digital and food, investors should still take the time to consider the implications of Starbucks' worse-than-expected comp store growth, as it's global comp store growth that ultimately speaks to the health of the company's global business. Still, China, digital, and food could all prove to be meaningful drivers for comp store growth over the long haul, so investors should keep an eye on these factors, too.