3 Important Lessons in Starbucks' Revenues – The Fool Motley

Finally!

It was a likely refrain of many Starbucks Corporation (NASDAQ: SBUX) investors after the publication of its fourth quarter earnings report 2018 after market close on November 1. The company recorded sales growth of 11%, adjusted earnings per share of 13% and global growth of 3% in same store sales. Perhaps the most important factor for many people is the firm's strong performance at 4%, the company's largest and most profitable market in the US, and by far the best result ever since. one year.

Starbucks also saw its Chinese stores rebound after a somewhat disappointing quarter and has made significant progress in its new venture with a global partner Nestle, to bring more Starbucks products into the hands of more consumers around the world. However, investors should also continue to monitor a number of things that did not really improve during the quarter, including another quarter of declining transactions and higher expenses, which weighed on the operating margin and margins. income.

The strong growth of compact cars has been positive, but the traffic trend remains disappointing

Starbucks investors are entitled to celebrate the company's fourth quarter results. This includes strong growth of 4% in the US, which remains the largest and most profitable market for the company, as well as a return to growth in China after a 2% decline in the third quarter of the year. 39, fiscal year, due to a combination of competitive prices, delivery difficulties and cannibalization sales by the new Starbucks stores.

In addition, as reported by COO Roz Brewer at the earnings call, beverage growth drove sales growth in the US, achieving 3 of 4 growth points.

This is where I will stop praising the results of comps and report the gorilla in the revenue release: Traffic. For another quarter, the company recorded a decline in transactions. Management stated that this was partly due to the change last year in the Starbucks Rewards program, which appears to have created an incentive for the combination of orders. But at this point, the company should soon "frame" these changes. If the number of transactions continues to fall, the trend is very worrying.

Brewer pointed out that there were some positive trends in traffic and that the company's investments to go where customers want it were paying off (that's me highlighting):

We continue to increase trading during peak periods (day) and we have seen a slight improvement in the day. This resulted in an improvement in one-year and two-year transactional transactions during the quarter. At the same time, we continue to balance our community and our commitment to third place while serving the interests of citizens. increasing demand for convenience. In the last quarter, our drive-through stores far outperformed our coffee mix. In addition, as part of our US portfolio strategy, more than 80% of our new stores during fiscal year 18 were driving, and this format will remain at the heart of the business. 19. In addition, combined controls, external orders and combined mobile and mobile orders now account for more than 50% of the way customers place orders, up more than 10 percentage points in just two years.

At the dawn of fiscal 2019, Starbucks' base of calculation will begin to reflect more drive-through stores, as well as delivery deployment, mobile order payment and payment to a more large number of stores, as well as personalized offers to non-member customers. . With so many initiatives aimed at attracting more customers and making the Starbucks experience even more convenient, there is plenty to be optimistic about the traffic trend.

Starbucks records growth, but higher costs continue to weigh on profits

For years, Starbucks has been incredibly good at generating stable operational leverage by taking sales growth of 10% and turning it into a 20% growth in earnings per share. However, the company has not been able to deliver the same products in recent quarters. As noted above, sales increased 11% in the fourth quarter, but adjusted earnings increased only 13% and GAAP earnings per share increased by only 4%.

It is interesting to note that Starbucks sales in the third quarter and adjusted net earnings per share also increased by 11% and 13% respectively.

We can use Starbucks' operating results and operating margin to get a better sense of the company's performance. On a consolidated basis, Starbucks' GAAP operating margin decreased from 17.9% to 15.2%. Including some non-recurring items, the adjusted operating margin decreased by 190 basis points to 18.1%.

Big drops are the result of "good" things and some challenges.

One of the main reasons for this decline is related to the change of strategy of the company in China. At the beginning of fiscal 2018, Starbucks took over the activities of its joint venture partner in mainland China, thus moving the entire market from one licensee to one company. Licensed stores generate significantly higher operating margins and, by incorporating all store operating expenses, Starbucks' China / Asia Pacific segment experienced a significant decline in operating margin, which went from 23.5% to 19.1%. Similarly, higher employee spending in the United States, as well as an increase in the composition of food sales (which margin is lower than that of beverages) drove the operating margin of 22.9% 21.8% in the Americas sector.

The transition to a consolidated model in China is preferable, because even if the operating margins are lower, the potential income is much higher compared to a low license fee. For example, China / Asia Pacific operating income increased 15% to $ 232 million in the quarter, although operating margin declined significantly.

Management takes action to boost sales and improve profits

Many of the above initiatives aimed at contributing to the growth of traffic and competitors would also improve results and results of operations. But they only represent part of the work of society. Last quarter, the company announced plans to make its stores more efficient, using automation and AI to remove about half of the administrative tasks of store employees. And it's not just a plan to reduce the labor costs of stores.

Management explains that the real goal is to free up two to three hours per day, which can be reallocated to the time available to the client. This should result in increased sales, higher throughput and a better Starbucks experience. And while the company plans to focus most of the year 2019 on implementing these changes, Brewer said they have already made substantial progress: they recovered about an hour and a half a day in some stores by redeploying and automating certain tasks.

Starbucks also continues to invest in "innovation in beverages," developing new menu items and distributing the most successful ones to more stores. Over time, these actions should help to compensate for changes in tastes or seasonal weaknesses, as we saw last quarter when sales of Frappuccino largely contributed to the weak results in the United States.

Looking to the future: moving from a year of transition to a year of action

The 2018 fiscal year was a transition period for Starbucks in multiple ways. Howard Schultz, long-time CEO and chairman of the board, is far removed from the company for the first time in decades, while longtime CFO Scott Maw will retire in November. The company made the bold decision to take full operational control of its stores in China this year, while closing its retail operations in Teavana, selling its Tazo tea brand and transferring operational control of its Tazo products. consumption at Nestlé as part of a transaction worth more than $ 7 billion. .

It's a lot of change in one year.

At the same time, management has regularly invested in digital capabilities to enhance the store 's experience and allow more people to spend money at Starbucks. 2019 should be the year these efforts begin to bear fruit. Oh, one more thing: Starbucks has also announced a massive $ 25 billion return on investment program, including both dividends and share buybacks, over the next few years.

At the time of writing this article, stocks are about to close at their record highs and will probably be very close to that after reading this article, after gaining about 9% after the announcement of the results. .

In other words, Mr. Market seems to have closed the Starbucks loop and again has high expectations for his prospects. All that remains to do is to the management.

Easy, right?