Starbucks (NASDAQ:SBUX) is developing a bad habit of missing its sales and profit growth targets. Following a disappointing fiscal 2017, the company had predicted a modest rebound for the new fiscal year.
But that hasn't happened. Instead, the coffee titan last week posted surprisingly weak first-quarter results. Below, we'll look at the reasons CEO Kevin Johnson and his executive team gave for the shortfall, and why they're still confident Starbucks can meet its full-year targets.
Through the first half of the quarter, our U.S. [comparable-store sales] were 3%, with strong performance at peak more than offsetting some softness in the afternoon. But, as we launched our holiday program in mid-November, we saw slow down in [traffic], bringing total comps for the back half of the quarter to roughly 1%, with [traffic] slightly negative. -- CEO Kevin Johnson
Starbucks missed its growth targets in the core U.S. market as the encouraging traffic uptick they noted at the beginning of the quarter fizzled and turned negative by the period's closing weeks. Executives pinned the blame on failed execution around holiday-themed beverages and merchandise. These drinks and products "did not resonate with our customers as planned," Johnson said, so comps improved by just 2% to pull global growth down to a 2% rate compared to their goal of between 3% and 5% gains for the full year.
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
While the U.S. market struggles, executives couldn't be happier with the company's performance in China. Customer traffic is growing at a healthy 6% pace there today, and profitability is expanding, too. That success supports Starbucks' aggressive plans to open 500 new stores per year in a country they believe will grow to many times the size of the U.S. market over time. "Starbucks has cracked the code on China," Johnson said, "and no western consumer brand is better positioned than Starbucks in China."
Cutting out what doesn't work
During the quarter, we accelerated and advanced our efforts to streamline our business. This simplification effort increases our focus and reduces operational complexity in our stores. -- Chief Financial Officer Scott Maw
Starbucks' turnaround strategy involves exiting weaker business lines so management can focus its attention and resources on the most promising growth avenues. To that end, the company completed the sale of its Tazo tea brand and closed several Teavana retailing locations this quarter. Starbucks fans can expect see more simplification ahead as the company removes about 200 products, or 30% of its retailing merchandise, from its store shelves.
Speeding up the U.S. growth pace
We are focused on elevating the Starbucks experience in the afternoon daypart as store partners sharpen operational focus and tune staffing and scheduling. -- Johnson
Starbucks is posting healthy growth during its peak morning hours. However, customer traffic in the U.S. market isn't meeting expectations during the rest of the day when its more occasional shoppers tend to frequent its stores.
Management aims to fix that problem with help from a bulked-up food menu and innovative beverages like the blonde espresso roast and the Nitro cold brew. Investors will know whether these launches are working by watching customer traffic, particularly during what Starbucks calls its "afternoon daypart," over the next few quarters.
Still committed to targets
When we recognize that our revenue, comp, and EPS performance in Q1 fell short of both our current quarter and long-term guidance, I want to make clear that our commitment to our long-term growth targets and strategy. -- Johnson
Starbucks' updated forecast predicts the company will only reach the low end of its sales growth guidance range of between 3% and 5% this year to mark no improvement over last year's expansion pace. Given the slow start to fiscal 2018, that means the chain will have to post significantly faster growth -- including a traffic turnaround in the U.S. -- over the next few quarters. Otherwise, management risks its second straight year of missing its annual performance targets.