Starbucks Corporation (NASDAQ:SBUX) stock is one of the few core holdings that investors expect to rise indefinitely. That is what SBUX stock has been doing for more than two decades, as the coffee chain rose from obscurity to become one of the world’s biggest and most prestigious brands.
And here lies the problem: Starbucks’ same-store sales growth isn’t the same today as it has been in the past. And if current trends are indicative of future ones, SBUX stock holders may have a problem on their hands.
Same-Store Sales Under Pressure
Analysts at Stifel are calling for Starbucks stock to benefit from a reacceleration of U.S. same-store growth to the tune of 5% to 6% moving forward. This would represent an acceleration from 3% in the most recent quarter.
Put in perspective, Starbucks’ same-store sales in the U.S. hasn’t fallen anywhere close to 3% since before 2012. In fact, Starbucks’ quarterly results page only goes back to the quarter ending October 2, 2011 where global same-store sales rose 9%.
But somehow investors are led to believe that the multi-year lows in same-store sales performance is just suddenly due for a rebound after years of coming under pressure? To justify this outlook, the analysts cite “increasingly favorable comparisons” along with “modest contributions” from beverages, more food options and technology.
Taking a step back and assuming Starbucks’ U.S. same-store sales receive a boost in the coming quarters from favorable comparisons, then what will happen next year when the easy comparisons no longer exist?
While this may create an opportunity for a swing trader or short-term investor, longer-term investors have little cushion in 2018 and beyond
Management Is Only ‘Quite Confident’
During Starbucks’ fiscal second-quarter earnings call, the company’s new CEO Kevin Johnson said that 2017 is shaping up to be a “year of two halves.” In other words, the first two quarters were characterized by poor U.S. same-store sales, but now it will start accelerating in the bottom half of the fiscal year.
And just how confident is Johnson this is the case? In his own words, “quite confident.” Not super confident, just “quite confident.” Granted, Starbucks’ isn’t sitting back and assuming that traffic and sales trends will improve on its own. The company has plenty of initiatives in place, including improvements to its mobile and pay ordering system, new menu options, personalization and up-selling in ordering, among others.
So far it’s working, as management cited an acceleration of same-store sales into April. But can this continue for the full quarter and not just a few weeks? Management dropped a hint which may cast doubt into the sustainability of same-store sales growth.
Chief Financial Officer Scott Harlan Maw told Goldman Sachs’ analyst Karen Holthouse during the Q&A session that its highest volume Mobile Order & Pay stores, a key component of both near- and long-term growth, were “slightly negative last quarter from a transactional standpoint, and they’re still slightly negative.” However, the executive did follow up that it is has “improved significantly quarter to quarter.”
Is he trying to say transactional volume is still bad — but just not as bad as the prior quarter? Granted, any improvement in transactional volume will likely be accompanied with a boost in same-store sales but this isn’t the kind of language investors want to hear.
Does Any Of This Really Matter?
Despite every point made above, investors might simply not care at the end of the day. Don’t believe this? Consider the following: Starbucks’ U.S. or global comp store sales growth has either fallen short of what analysts were expecting or decelerated on a sequential basis each and every quarter over the past year. Yet SBUX stock is holding its own just fine and is now trading at all-time highs.
After a disappointing second-quarter 2016 report, SBUX stock fell nearly 5% and one month later it was down 10%. Investors who took this opportunity to buy on the dip were rewarded as the stock rebounded.
SBUX stock moved higher after the third- and fourth-quarter reports despite same-store sales misses. But the fiscal first-quarter 2017 report sent shares lower by around 4% only to rebound above its pre-earnings price.
While one could make the point that Starbucks’ international business is hot, especially China, the fact remains that U.S. sales accounted for around 70% of total sales in the recent quarter.
Bottom line, for SBUX stock to work, U.S. sales need to improve — and fast.
As of this writing, Jayson Derrick did not hold a position in any of the aforementioned securities.
