Chinese customers are become more frugal, while US consumers are still prepared to spend more on their chai tea and pumpkin spice lattes.
Starbucks’ total revenue increased by 11% to about $9.4 billion, above Wall Street’s projected $9.28 billion. The company’s adjusted profits per share also exceeded expectations, coming in at $1.06 as opposed to $0.97. A 4% rise in ticket size and a 3% increase in traffic drove an 8% gain in global same-store sales.
Customers in the US and North America added a record quantity of food to their orders and were prepared to spend extra for their premium seasonal beverages. In the US, same-store sales increased by 8%.
In a letter to clients before to results, Baird analyst David Tarantino stated, “Heightened promotional activity plus the earlier launch of Pumpkin and fall drink lineup likely supported traffic in a difficult discretionary spending backdrop.” The 20th anniversary of the pumpkin spice latte was celebrated this past quarter.
CEO Laxman Narasimhan stated during a conference call with investors that although the team is “navigating the uncertain economies and markets around the world,” customer demand and mood are still high. It speaks to “the long-term durability of this business,” he continued, as well as Starbucks’ place in consumers’ daily lives.
As Chinese consumers cut back on their coffee consumption amid a weakening economy, the company’s overseas operations experienced difficulty, with ticket sizes declining.
International same-store sales increased by 5%, below Wall Street’s prediction of 6.29%. China’s same-store sales increased by 5%, above forecasts. Despite an 8% increase in foot traffic, fewer customers placed orders, and the average ticket size decreased by 3%.
In addition to expressing satisfaction with the “overall returns” in China, Narasimhan said the team was “heartened by how the business is coming together despite all the headwinds that have been there for the last couple of years.”
Over time, Starbucks has increased its investment in its global operations. It just revealed that it has opened its 20,000th shop outside of North America. Over the next two years, it intends to add approximately 1,000 new locations annually and grow to 9,000 stores in China.
61% of the company’s worldwide portfolio consisted of shops in China (6,806 locations) and the US (16,352 sites) as at the end of the previous quarter.
Last quarter, the firm opened 816 new sites, increasing its total to 38,038 outlets, of which 48% were licenced locations and 52% were company-operated. Customers returning to their pre-COVID routines and China relaxing its stringent lockdowns in 2023 have helped its outlets.
Starbucks revised its long-term target for fiscal year 2024 from 7% to 9% to 5% to 7% global same-store sales growth. Sales growth in China is predicted to range from 4% to 6% from Q2 to Q4.
During the call, CFO Rachel Ruggeri stated that EPS growth should be in the range of 15%–20% and overall revenue growth should be around the lower end of the 10%–12% range.
Fears about weight loss medicines and a lack of confidence among consumers have hurt the stocks of food and beverage firms. Starbucks’ stock has lost about 8% of its value this year, while the S&P 500 (^GSPC) has gained 9.5%.
Analyst Danilo Gargiulo of Bernstein stated in a client note that investors have “expressed scepticism” about Starbucks’ “ability to meet management’s ambitious goals.”
Consumer spending and the post-COVID recovery are still in flux, and there is still a labour shortage. According to Gargiulo, the company’s emphasis on making costly equipment upgrading investments in an attempt to boost retail efficiency could not have the intended effect.
Former CEO Howard Schultz initially unveiled the idea in September of last year. CEO Narasimhan, who assumed the position in April, offered his interpretation. He stated during the meeting that it is the “next step in the refounding, building on the mission and laying out our long-term strategy.”
Over the next three years, Starbucks wants to undertake a $3 billion efficiency programme, of which $2 billion may be saved outside of the shop. In addition, it seeks to quadruple workers’ hourly wages from fiscal year 2020 to fiscal year 2025 and revitalise employee culture—a goal Narasimhan established at the beginning of his term.
The business anticipates long-term sales growth of 5% or more, revenue growth of 10% or more, and profits per share growth of 15% or more with this revised strategy.
“Commentary regarding $3B in gross cost savings over the next three years also suggests SBUX could reduce the [long-term] top-line guide this afternoon while maintaining 15%-20% EPS growth — a scenario considered the most credible outcome,” Jon Tower, a Citi analyst, wrote in a note.
The strategy also calls for strengthening and expanding digital, expanding internationally, and enhancing the brand.
The firm intends to increase net new store growth by 4% in fiscal year 2024 to reach 20,000 total locations. This is in line with its ambitions to further reevaluate its US store portfolio, as investors witnessed with the recent seven store closures in San Francisco.
By 2030, Starbucks hopes to have 55,000 locations worldwide, adding eight new locations per day on average. The beverage giant stated that it anticipates its foreign division to contribute around one-third of its yearly profits growth over the next three years.
The corporation wants to make improvements to operations within the stores. Sales of $1 billion are “expected very soon” for the delivery industry, according to Sara Trilling, president of North America. Although delivery-only locations presently account for less than 1% of the firm’s portfolio, the company plans to fulfil almost 40% of delivery orders with them in order to satisfy that demand.
The company’s efforts to encourage customers to visit stores more frequently and the growing demand for snacks have led to Brady Brewer, chief marketing officer at Starbucks, to mention that customers may anticipate “new grab-and-go food products” and “a widening snack selection”.