Starbucks shares plummeted Tuesday evening by roughly 11.5% after the coffee giant delivered a much weaker-than-expected quarter.
The company also cut its outlook for fiscal 2024, leaving little room for optimism of a quick rebound in traffic at its stores.
Revenue fell 2% year over year to $8.56 billion in the fiscal 2024 second quarter, below the $9.13 billion expected by analysts, according to LSEG. Adjusted earnings per share of 68 cents fell 14% year over year, missing the 80-cent estimate.
Comparable store sales in North America—a key restaurant industry metric—fell 3%, well below estimates of the 0.5% growth forecasted by Wall Street analysts, according to FactSet. What was most concerning here was that transactions were down 7%, representing a huge drop in people coming to the stores. Ticket was up 4%, offsetting some of the transaction weakness, but price hikes can only take you so far.
Challenges related to a more cautious consumer plagued the quarter, but management said severe weather was a major factor too, impacting both U.S. and total company comps by 3 percentage points.
Another headwind was from fewer visits from Starbucks’ so-called “more occasional customers” which are a frequency step below its most loyal customers.
On the conference call, CEO Laxman Narasimhan highlighted three execution opportunities to get the US business back on track. The first is to meet the demand it has across dayparts to drive future growth by investing in new tools and implementing new processes.
One solution Starbucks has come up with is its siren craft system, which is already increasing peak throughout by nearly 1 comp point annually in the stores that have it. The company must do better to improve operations throughout and decrease wait times in stores to spur growth, so we were pleased to hear that this was a focus.
The second is to launch even more new products while continuing to focus on its core coffee-forward offerings. The third is to reach and provide more value for the occasional and non-Rewards customers.
Unlike last quarter where operating margin expansion helped offset some of the comparable store growth softness, profitability contracted 110 basis points from last year, primarily due to deleverage, incremental investments in store partner wages and benefits, and increased promotional activity.
However, the company said efficiencies generated through its reinvention plan helped offset some of the deleveraging.
In Starbucks’ international segment, comparable store sales fell 6% and missed estimates of 0.5% growth. The decline was balanced with a 3% drop in both transactions and tickets.
The results in China were worse, with comparable sales falling 11%, with transactions down 4% and tickets down 8%, a result of higher promotional activity as the company deals with rising competition from local players. The street was looking for flat comparable sales in China, according to FactSet.
But the results were impacted by more than just the promotional environment. A decline in the occasional customer and changing holiday patterns also weighed on the results.
Excluding China, the international segment grew revenue and comps in Latin America, the Asia Pacific, and Japan.
Following the disappointing fiscal second results, the company made several downward revisions to its fiscal year 2024 guidance. The changes were:
Total global revenue growth of low single digits from the previous range of 7% to 10%.
Global and US comp growth in the range of a low single-digit decline to flat from the previous range of 4% to 6%.
China comparable sales are expected to decline by a single-digit percentage versus expectations of low single-digit growth in the second quarter through the fourth quarter.
Global net new store growth was tweaked down from 6% to 7%. That’s due to slower China store openings, which was revised to 12% growth from 13%.
Operating margins are expected to be flat versus previous expectations of progressive expansion.
Adjusted EPS growth is expected to be flat to low single digits, down from its previous range of 15% to 20%.
