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Starbucks Is On to Something

By Demitri Kalogeropoulos – Feb 3, 2020 at 12:00PM

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The first-quarter results show the coffee chain has a recipe for delivering market share growth.

Starbucks (SBUX -0.63%) investors this week focused most of their attention on the negative financial impacts that a virus outbreak in China might have on the wider business. The management team revealed widespread store closings in recent days, and the volatile situation persuaded executives to resist upgrading their fiscal 2020 outlook following a record first quarter.

In a conference call with Wall Street analysts, CEO Kevin Johnson and other leaders discussed the scale of those Q1 operating wins while detailing a few promising growth initiatives in the works for the rest of the year. Below, I'll look at some highlights from that presentation.

A woman drinks coffee in a to-go cup.

Image source: Getty Images.

The U.S. rebound has legs

With the two-year sales comp of 10% for the past two consecutive quarters, it is clear that our focus on the customer experience, beverage innovation, and digital customer relationships is working.
-- Johnson

It's a good sign when a consumer company can point to several metrics that all imply its growth strategy is delivering robust results. Starbucks did just that this quarter, as global comparable-store sales rose 5%. The U.S. market was especially strong, with 3% higher customer traffic combining with a 3% average spending boost to push comps up to 6%. That result easily beat McDonald's (MCD -0.80%) trends over the same period and likely cemented the coffee titan's leadership position in the domestic restaurant industry.

Management cited several other metrics that told a similar story, including the fact that comps and traffic rates have outperformed the industry for over a year now. Comps on a two-year basis are up double digits over the past two quarters, too, indicating a meaningful growth acceleration. CFO Patrick Grismer tied the market share gains to three factors: improved customer satisfaction, popular drink releases, and a winning digital ordering and payment strategy.

Beating back the competition

There is no doubt that our partners and the investments we make in them are at the core of creating the unique Starbucks experience that fueled our Q1 performance.

Executives outlined several major factors that supported the unusually strong start to the year. Some of them, like popular seasonal drink releases, can be replicated by rivals like Dunkin Brands (DNKN). Others represent part of Starbucks' competitive advantage, though, including its leading brand affinity in both the U.S. and China, its ability to customize and personalize drinks at scale, and its massive digital platform. That e-commerce segment saw a 16% spike in membership, for example, up to 19 million users.

An upgrade delayed

Given the strength of our first-quarter results, we had intended to raise certain aspects of our guidance for the full fiscal year. However, given the extraordinary circumstances that are rapidly developing in China, we are simply reaffirming our original guidance and will provide an update when we have better visibility to the impact of coronavirus.
-- Grismer

Starbucks could have lifted its outlook, considering comps were 5% to start the year while the company is officially targeting gains of 3% to 4%. Its 20% operating income spike this quarter similarly outperformed the annual 2020 target by a wide measure. Yet management decided the quickly developing situation in China, which is comparable to the U.S. in terms of its importance to the business, warranted caution.

While it's anyone's guess how the virus outbreak might progress from here, it's clear that Starbucks has an effective plan in place to win market share. "We do not take this [performance] for granted," Johnson said. "We will continue to take clear and decisive steps to build our brand for the future, focusing on our competitive advantages: investing in our partners as they create those unique Starbucks experiences for our customers, driving beverage innovation, and enhancing digital relationships."

Demitrios Kalogeropoulos owns shares of McDonald's and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

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