It's too early to call it a comeback, but Starbucks' (NASDAQ:SBUX) business is clearly on the mend. The coffee titan just opened its new fiscal year by continuing -- and in some cases improving on -- the encouraging trends that drove its strong close to fiscal 2018.
In a conference call with investors, CEO Kevin Johnson and his executive team went over a few of the major contributors to those robust results while outlining the biggest challenges going forward. Below, we'll look at a few highlights from that presentation.
Not a fluke
The positive business momentum that we experienced in the fourth quarter of fiscal 2018 clearly sustained throughout Q1.
Starbucks' 9% overall revenue growth was powered by the combination of 4% higher sales at existing locations, or comps, and a 7% increase in the store restaurant base. Looking deeper into the results, they indicate that last quarter's rebound wasn't just a fluke and that the business is on stronger footing than it was in early fiscal 2018.
Customer traffic was flat in the key U.S. market, which represented the second straight quarter of improving transaction trends. Starbucks also stabilized in China with a 1% comps uptick.
Getting back to basics
Beverage, our highest-margin category, was the primary driver of U.S. comp growth.
-- CFO Pat Grismer
Starbucks improved its dining experience in a few ways, including by reducing tasks for employees so they could spend more time serving and connecting with customers. The bigger success came from moving back toward its roots, though, with staple espresso beverages and new introductions like nitro delivering almost all the sales gains. Food was a modest positive, meanwhile, and Starbucks' retail sales were again a slight drag as the company cleaned up its shelves.
Playing the long game in China
This month marks the 20th anniversary of Starbucks in China, and we continue to play the long game with our purpose-driven growth agenda.
China is Starbucks' second-largest market behind the U.S. and is its biggest growth opportunity, with thousands of additional stores planned there over the next few years. That's why it was good news for the business that sales stayed in positive territory for the second straight quarter. I's 1% comps uptick, executives said, consisted of a 2% drop in customer traffic and a 3% increase in average spending.
Management says they're happy to see that the latest crop of stores is delivering strong returns. They caution that the selling environment could stay difficult over the short, term, though. "With a large and growing addressable market around coffee," Johnson said, "we expect competition to remain highly promotional and disruptive."
A rare upgrade
Our growth-at-scale strategy is working, and our leadership team is fully committed to the future growth and vibrancy of Starbucks.
Starbucks left most of its full-year targets, including new store openings and profitability, unchanged. It upgraded its core growth forecast, though, to call for comps of between 3% and 4%. At the start of the fiscal year, executives cautioned that growth would land at the low end of that range but now they're comfortable erasing that qualification.
Sure, that constitutes a minor upgrade. But given that Starbucks failed to meet expectations in each of the last two fiscal years, the boost suggests the business has stabilized and is perhaps on the cusp of a rebound. The next few quarters of sales growth, and particularly customer traffic trends, will determine whether that recovery happens or not.