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May 26, 2024

Starbucks Misses Sales Targets Amidst Slowing Demand

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Jan 31, 2024

Starbucks reported lower-than-expected sales growth for the first fiscal quarter of 2024 on Tuesday, sending its shares down over 3% in after-hours trading. The coffee giant has been facing headwinds from inflation, investments in stores and employees, and slowing demand.

First Quarter Performance

Starbucks reported the following first quarter results:

  • Revenue: $9.4 billion, up 8% year-over-year
  • Earnings per share: $0.75, down from $0.85 last year
  • Same-store sales growth: 5% globally, below expectations of 6.7%

The company saw slower sales growth in its dominant U.S. and China markets. Same-store sales in the U.S. grew by only 2%, much lower than the previous quarter’s growth of 10%.

CEO Howard Schultz cited decreasing customer traffic in November and December as more consumers cut back on discretionary spending amidst inflationary pressures. Starbucks also invested heavily in improving pay and benefits for its baristas over the past year.

While many cost pressures have abated, Starbucks continues to see higher costs in areas like wages and commodities. Operating margin declined from 18.7% last year to 16.5% this quarter.

Schultz reaffirmed the company’s long-term guidance but lowered near-term expectations. Starbucks now expects full-year earnings per share growth of 10% to 12%, down from 15% to 20% previously.

Lead Up to The Results

Starbucks entered 2023 on strong footing after two years of navigating pandemic uncertainty. Full-year revenue rose 11% in 2022 on the back of strong demand trends.

The coffee chain benefitted from steady growth in customer traffic, ticket size, and spending on premium customization options like dairy and syrups. Menu price increases also boosted sales.

However, macroeconomic headwinds intensified in the latter half of 2022. Surging inflation led the Federal Reserve to aggressively hike interest rates to cool the economy.

This has pinched consumer spending and eaten into Starbucks’ margins despite multiple price hikes over the past year. Many analysts believe the company will have to undertake additional price increases in 2023 to protect profitability.

Heading into earnings, analysts had tempered expectations but still projected decent growth on the assumption that Starbucks’ loyal and affluent customer base will weather the economic storms better than other restaurants.

Commentary From Management

On the post-earnings conference call, Schultz stated:

“These results underscore the resilience of Starbucks and reinforcement of the trust we have built with our customers over the past 51 years. However, we are not satisfied because we know we can do better.”

He outlined plans to drive growth through enhancing the Starbucks Experience, investing in employees, doubling down on digital relationships, and optimizing stores for speed and convenience.

CFO Rachel Ruggeri expanded on the various growth levers:

“While macroeconomic headwinds impacted traffic and sales trends this quarter, Starbucks has a strong track record of successfully navigating through uncertain operating environments.”

She cited nine drivers of growth and margin recovery over the next year:

  1. Investing in quality, speed, and convenience
  2. Personalized digital relationships
  3. Enhancing food attach
  4. Trade-up offers like cold coffee
  5. Pricing strategies
  6. Labor efficiency
  7. New store formats and relocation/remodeling
  8. Supply chain improvements
  9. Commodity cost easing

Outlook and Implications

Starbucks trimmed its guidance for 2023 based on the weaker-than-expected start to the year. But management emphasized confidence in achieving the new full-year targets based on an improving growth trajectory over the next three quarters.

Schultz lamented the loss of market share in the packaged coffee category as competitors like Nestle, JDE Peet, and Dunkin’ Donuts saw stronger growth recently. He suggested Starbucks may have become complacent and taken its leadership position for granted.

The company sees significant white space to expand Ready-to-Drink (RTD) coffee and capture share through innovation. Management highlighted rising demand for premium RTD options like nitrogen-infused cold brew.

In China, Starbucks continues working to fully recover from last year’s sales drop stemming from temporary COVID-related restrictions and anti-Western consumer backlash. But competition is increasing rapidly across coffee, tea, and new retail store formats.

Category 2023 Guidance Previous Guidance
Revenue growth 7% to 9% 10% to 12%
Comparable sales growth 5% to 7% 7% to 9%
Adjusted earnings per share growth 10% to 12% 15% to 20%

Starbucks expects operating margin to dip in 2023 due to inflation and strategic investments before recovering back to 18% by 2024. The company remains committed to the ambitious goal of reaching 45,000 stores globally by 2030, up from 36,000 currently.

Final Thoughts

While Starbucks faces near-term uncertainty amidst a weakening consumer and inflationary pressures, its unparalleled brand strength and customer loyalty should power through over the long run.

Management has shown willingness to make bold moves when needed – whether shutting stores for racial equity training or enhancing worker benefits. Starbucks is well-positioned to navigate the tricky macro environment and continue delivering steady, long-term growth.

But competition is rising, and the quarter’s miss highlights that Starbucks must keep innovating around premium offerings, digital engagement, and store formats to maintain dominance. Margins may remain pressured until growth re-accelerates.

Investors will watch to see whether traffic and sales trends show improvement over the next few quarters. Future innovation around RTD coffee and alternative dairy options also bears monitoring.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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