Investors weren't expecting much good news from Starbucks' (NASDAQ:SBUX) fiscal third-quarter report. After all, the coffee titan had warned that it would miss growth expectations after sales slowed in key markets like the U.S. and China.
Starbucks didn't deliver many surprises in its revenue and profit figures. But the company did go into detail about how it expects to begin turning things around over the coming quarters. Below are a few key quotes from management's conference call with investors on that key topic.
Optimism for the U.S. business
I remain extremely optimistic about the future of our U.S. business for several reasons.
-- CEO Kevin Johnson
Starbucks' U.S. segment turned in an unusually weak performance, with customer traffic falling and overall sales growth slipping to 1% from 2% in the prior quarter. Part of that slump can be pinned on the chain's temporary store closure for anti-bias training, but the segment still fell short of management's broader expectations.
The frappuccino business joins seasonal holiday merchandise as a key product category that has significantly trailed targets recently. Yet Starbucks executives aren't worried about the fact that sales missed their forecasts in two of the last three quarters. Instead, they believe they'll turn things around with help from a packed pipeline of innovative drink releases and strong growth in Starbucks' digital rewards program.
As support for this prediction, COO Rosalind Brewer noted that the company enjoyed growth in all product categories, excluding frappuccino, and in both its morning and afternoon sales hours. "With these indicators of brand strength," Brewer explained, "we continue to move with speed to reposition the business for growth."
About that China slump
We believe the [sales decline] we posted in Q3 is not a reflection of the strength of our business and brand in China.
-- Starbucks China CEO Belinda Wong
Management said the 2% sales decline in the China division, compared to a 4% gain last quarter and a 6% increase in the prior quarter, was the result of a "perfect storm" of temporary challenges. These included struggles with third-party home delivery services, aggressive price-cutting by rivals, and a temporary bump in cannibalization of sales from newly launched stores.
The new competitors don't have staying power to match Starbucks over the long term, management believes. And the company plans to fix its delivery issues starting with a major new service that it's piloting in Beijing and Shanghai over the next few months. Overall, the chain is confident it has a long growth runway ahead in the country. "We have learned from our 19-year experience and developed a very strong brand and operating model in China that competitors have yet to figure out and will never be able to replicate," executives said.
New 2018 targets
Full-year [sales growth] will likely come in just below our 3% to 5% range, and we expect Q4 to be at the lower end of this range.
-- CFO Scott Maw
Starbucks lowered its sales growth target for the second time in three quarters and is now expecting to undershoot management's expectations for the second straight fiscal year. Profitability is also expected to take a hit thanks to spending on training and new digital sales initiatives. The chain's store growth plans remain aggressive, with 2,300 locations set to open this year around the world. But in the sluggish U.S. market, those stores will be focused in less-populated areas and will be mostly drive-through locations.
Given the conservative forecast for the next quarter, investors won't know whether the company's strategic moves, particularly its ramped-up beverage innovation initiatives, are meaningfully boosting results until the beginning of fiscal 2019 at the earliest.