In this segment of the Motley Fool Money podcast, host Chris Hill and Fool senior analysts Matt Argersinger, David Kretzmann, and Aaron Bush talk Starbucks (NASDAQ:SBUX), which delivered what on the surface looked like a caffeinated quarter, with the top and bottom lines hitting new highs. But, as the Fools explain, once you sip past the foam of the earnings latte, there really wasn't that much to like in this report. Comps numbers in particular, especially in China, were worrisome.
Meanwhile, recovering chain Chipotle Mexican Grill (NYSE:CMG) saw better same-store sales in its second quarter thanks to higher tickets. Also powering the company's gains: its digital tools.
A full transcript follows the video.
This video was recorded on July 27, 2018.
Chris Hill: All Starbucks did in the third quarter was post record profits and record revenue. Shares of Starbucks up a little bit on Friday, Matty, but it's not really getting the response that we've seen, certainly, when you're posting record numbers.
Matt Argersinger: Right, and mainly because they pre-announced pretty much all of this about a month ago. If you remember, that day, the stock got hit pretty hard, and they guided their comps down. The news is just flowing out of that. The 11% increase in revenue, which took them up to a record, it's mostly from new store openings and the fact that they consolidated their East China business, which was previously licensed. Those are now owned and operated stores.
There's not a lot to like about this release, actually. We know that comps have been trending down. They were down again, only up 1% in the current quarter. What's interesting here is that China comps, which have been so strong, were actually down 2%. That was surprising. On the call, management talked about the fact that in China, they're really just focusing on new store openings right now. They feel like a lot of their new stores in very urbanely dense cities like Shanghai and Beijing were cannibalizing some of the older stores. They're OK with that right now, because they're really just focusing on the footprint.
So, there's that to worry about. Again, we just want to see those comps bounce back. The trend is, right now, not in Starbucks' favor.
Hill: It's really not. It's almost like they need to clean up their house a little bit over the next couple of quarters. I'm a shareholder of Starbucks, but I look at this company and I think, "I don't really have any expectations for the rest of 2018 for this one."
Argersinger: I agree. I think domestically, they probably know that they've over-extended in certain places, and they need to roll back.
David Kretzmann: One bright spot in the U.S. is that they're finally seeing growth in their digital platform. They now have over 15 million active Starbucks rewards members. That's up 14% year over year. It's been a while since we've seen that kind of growth. They have more plans over the next year to revamp that digital platform. I think that'll be key.
Hill: Shares of Chipotle up 4% this week after a solid second quarter report. Chipotle's same-store sales were up due to higher average tickets. David, foot traffic down a little bit, but it looks like Chipotle is exercising a little bit of pricing power.
Kretzmann: I'd say the biggest bright spot for the company right now is the fact that they're going all-in with their digital platform and their initiatives there. They're seeing some nice traction. They have 4 million monthly active users on their app or website, that's up 65% so far this year. Digital sales this quarter were up 33%, now making up 10% of revenue. Now, they have a second line in the back of the kitchen that's plugged into that digital platform in over 500 locations, and more to come.
Those digital tools really help engage customers, keep people coming through the app and the website. Much more convenient. They're also testing out pick-up shelves, similar to Panera. You can order online, walk right into the store, and pick your food up off the shelf. They have that rolled out in a few locations in New York, and it'll probably be coming to more locations soon.
Hill: What about the queso? Have they fixed that? Have they done anything to fix the queso?
Kretzmann: All they'll say is that queso is still a positive contributor to sales. I personally haven't tried the queso in about six or seven months, so I might have to try the recipe again.
Argersinger: I can see Mac shaking his head behind the glass. He's obviously not a fan of the queso.
Hill: That's the investor equivalent of damning with faint praise. That's about as faint as it gets.
Chris Hill owns shares of Starbucks. David Kretzmann owns shares of Chipotle Mexican Grill and Starbucks. Matthew Argersinger owns shares of Chipotle Mexican Grill and Starbucks and has the following options: long January 2020 $45 calls on Starbucks. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool has a disclosure policy.