DIN SHORT CALL
DIN is a melting Ice cube, and we are moving DIN up the SHORT LIST to a top five SHORT, and we will be hosting a Black Book on 02/03/23 @ 12:30 PM.
EVENT DETAILS:
- Date & Time: February 3rd at 12:30 PM ET.
- Webcast & Slides: CLICK HERE (Refresh shortly before the call).
- Add To Your Calendar: CLICK HERE
SBUX
What are you playing for?
The company missed 1Q23 by a wide margin, pushing out the China recovery; margins in China will not recover to 2019 levels; traffic in the USA is slowing, and the company is not baking in any slowdown in North America; in North America, there was limited flow thru to margins on 12-13% price (9% average check). With that backdrop and taking into account the uncertainty of China's recovery timing - "fiscal 2023 guidance remains unchanged.
I guess interim CEO, Howard Schultz, did not want to lower guidance on his last earnings call, but he should have taken the pain now. He has now left that up to the new CEO, who will likely have to do that 1-2 quarters into his tenure running SBUX. At the very least, as pricing slows and traffic decelerates, SSS will slow to LSD in 2H23, and the CEO will need to explain why comps are below long-term guidance.
With SBUX up 28% over the past three months, the storytelling around SBUX and its China recovery was extraordinary. Not only was there no recognizable recovery happening in China, the company also pushed out the recovery timeline by 3-6 months. The company has said the China recovery would be non-linear but guided to better trends and said on the 4Q22 call that "our recovery in China gained momentum in Q4 China's despite severe mobility restrictions in many of our largest cities." That didn't happen:
- CHINA WAS A DISASTER - "In Chin," COVID-related mobility restrictions and a spike in COVID infections following the end of zero COVID resulted in comp sales of minus 29% for the quarter, four times worse than what we expected."
- EX-China, the international business was strong - "Excluding China and foreign currency translation, revenues for the quarter were up 25%, and comps were up 11% fueled by recovery consumption in Japan and a rebound "n tourism activity across our EMEA markets following the lift of COVID restrictions."
- Recovery Timeline ?'s- "Although we previously projected China recovery as early as Q3 of this F.Y., we do not have a clear line of sight into the timing of recovery and believe China's contribution as a percentage of our FY2023 consolidated operating income to be lower than our original guidance assumed."
- CHINA MARGINS BELOW 2019 - In terms of a margin expectation, we would expect the margin to be different than what we saw in 2019 as you see the growth in digital. Just to give you an example, in 2019, digital was about 10% of overall sales in the market. It's now closer to 50%. So it has a different margin structure to it. We know it leads to more overall dollars and overall volume, but it does change the margin structure."
SBUX reported a global comparable store of 5% during 1Q23, which fell short of the consensus estimate of +6.9%. Average ticket was up 7% to offset a 2% decline in transactions during the quarter. Total revenue was up 8.2% to a record $8.7B. Comparable sales in North America increased 10% vs. +7.6% consensus, driven by a 9% increase in average tickets. Comparable transactions were up 1% in the region. Operating margin fell to 18.5% of sales in the region from 18.9% a year ago, with labor and input costs higher. International comparable sales fell 13% during the quarter. China comparable store sales dropped 28% vs. a consensus estimate of -13%, driven lower by a 28% decline in transactions with COVID restrictions holding back traffic in key cities. Active membership in Starbucks Rewards in the U.S. rose 15% to 30.4M during the quarter. The company's consolidated non-GAAP operating margin fell 20 basis points to 14.4% of sales. The company opened 459 net new stores during the quarter, ending the period with a record 36,170 stores globally.
BYND is shrinking
The company is shrinking to save itself, but there is little end demand for its product. We are still calling for BYND to go to zero.
A string of bad news for the company:
First, a series of class-action lawsuits alleging deceptive practices by Beyond Meat will be heard as a single case in Chicago, a court ruled Wednesday. The suits allege Beyond Meat Inc., which sells plant-based meat-substitute products, miscalculates and overstates the protein content in its foods and mislead consumers about the nutritional benefits compared to traditional meat products. The lead complaint, filed in September, alleges that a method of testing a product's protein content — through an interaction with a nitrogen compound — reveals some Beyond Meat products contain less protein than what is required to be shown on a label.
Second, the WSJ is running an article that says BYND has a smaller footprint suggesting it can only focus on a few larger retailers, KR, WMT, and COST. The article goes on to point out:
- IRI data continues to see volume declines
- Wants to be cash flow positive by 2H23
- Trying to reduce excess inventory
- Trying to reduce costs tied to its beef jerky product and an MCD chicken nugget
- Selling food processing & laboratory equipment to raise cash?
- Scaling back plans for the new HQ, which has a room with a wall that has "yellow tiling" dedicated to testing MCD products?
