Going into Starbucks (SBUX +0.54%) third-quarter financial report, investors were hoping for the best but prepared for the worst. After previously guiding for comparable-store sales growth of between 3% and 5% for the full year, the company has revised those expectations. After two successive disappointing quarters, Starbucks said that it would only achieve a 1% year-over-year global comp sales increase for the third quarter.
But it delivered record third-quarter revenue that grew to $6.3 billion, an increase of 11% year over year, and earnings per share of $0.61, up 13% compared to the prior-year quarter. Those results were driven by global comparable store sales that increased just 1%, just as management had telegraphed, on a 2% decline in transactions and a 3% increase in the average ticket. This represents a further decline from the 2% comps the company achieved in the prior period.
Image source: Starbucks.
The raw numbers
|
Metric |
Q3 2018 |
Q3 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$6.31 billion |
$5.66 billion |
11.5% |
|
Operating income |
$1.04 billion |
$1.04 billion |
(0.6%) |
|
Diluted earnings per share |
$0.61 |
$0.47 |
29.8% |
Data source: Starbucks Third-Quarter Financial Release. Chart by author.
Not much to like
A couple of disappointing developments drove the coffee chain's disappointing results. First, blended Frappuccino beverages, which had long been a mainstay, have seen slowing growth in recent years, the result of consumers making healthier choices. Declining sales have hit the coffee chain particularly hard, as the beverages were previously big sellers in the hot summer months. Another issue contributing to the lower comps was the recent store closures to conduct anti-bias training. Starbucks estimates that the one-two punch of these two factors combined to reduce same-store sales by three percentage points.
Then, there were the poor results in China. Comparable-store sales in the China/Asia Pacific region declined 1%, while falling 2% in China. Much of Starbucks turnaround plan has rested squarely on the back of its expansion in The Middle Kingdom. The company plans to build 600 net new stores in each of the next five years in mainland China, which will double the company's store count from 3,000 to 6,000 by fiscal 2022. Starbucks has so much riding on this market that the declining sales there couldn't have come at a worse time.
The company tried to focus on the few positives in the report. Starbucks Rewards, the company's loyalty program, added 1.9 million active new members in the U.S., up 14% year over year. The company also said that Rewards members now represent 40% of all sales at its company-operated stores. Mobile Order and Pay, the app that allows members to place their order in advance to be ready for pickup, now accounts for 13% of all transactions at company-operated locations.
Creeping down
Starbucks revised its outlook for the full year, saying that its full-year global comparable-store sales growth would be "just below" the 3% to 5% it had previously targeted -- and that the fourth quarter would be at the low end of the 3% to 5% range. The company continues to expect revenue growth in the high single digits, excluding the effect of the East China integration. Starbucks is guiding for earnings per share in a range of $3.26 to $3.28.
The company may have touted this as a "record" quarter, but the challenges that remain far outweigh the minimal good news the company was able to deliver.
